OPINION: Acting as director carries risks for small business

Being the director is a company might seem to be a charmed life, but it comes with a lot of responsibility and can be a legal minefield

IN SMALL companies, I usually find that all the owners and even some key employees want to be directors - but such a role carries a high level of risk and responsibility. Are you prepared to put your house on the line?

Sure, being a director provides a level of control, influence and carries the charm of an important title. However, directors can be held personally liable where:

The company continues to trade and incur debts even after it becomes, or is reasonably suspected to be, insolvent (unable to pay its debts as and when they fall due);

Company losses are caused by a breach of directors' duties - eg duty to act in good faith and with a proper purpose, including avoiding conflicts of interest; acting with due care and diligence; not to improperly use the position or information;

The directors have signed personal guarantees;

Debts are incurred by the company acting as trustee;

There are breaches of legislative requirements. There are over 600 laws at federal, state and territory level under which a director can be personally liable: e.g. workplace health and safety, competition law, taxation, environmental laws.

Directors can also be held criminally liable, including face jail time, for certain breaches.

Proprietary companies only need one director. There is no need to expose everyone's assets.

For the comfort of the other shareholders, the decisions of the board can be limited through a Shareholders' Agreement. Also, a Shareholders' Agreement can contain a provision that if any of the other shareholders wish to be appointed (or have a nominee) appointed as a director at any time, then the other shareholders agree to vote in favour of such.

Be warned though, even a person who is not actually appointed as a "director" but acts informally as a director (a defacto director), or is someone who the directors are accustomed to acting on the instruction or wishes of, can be considered a "director" at law and be subject to the same risks and responsibilities as a properly appointed director.

Originally published as OPINION: Acting as director carries risks for small business