If you have been asked to accept a position as a director of a company in which you have little or no involvement, think carefully before saying yes. Many spouses accept appointments as co-directors of their partner’s company without fully understanding the legal responsibilities that come with the role. This arrangement is commonly referred to as being a ‘silent director’.
Although Australian law does not prohibit someone from acting as a silent director, every director has legal duties and obligations regardless of how involved they are in the business. Before accepting a directorship, it is important to understand exactly what you are agreeing to.
What is a silent director?
A silent director is someone who has been formally appointed as a company director but has little or no involvement in the company’s day-to-day operations or decision-making.
Despite the name, the law generally treats silent directors in the same way as active directors. This means you may still be personally responsible if the company breaches its legal obligations.
| Active Director | Silent Director |
|---|---|
| Manages daily operations and business decisions. | May have little or no involvement in management. |
| Regularly reviews company finances and compliance. | Often relies on others to manage the business. |
| Has the same legal duties as every other director. | Has exactly the same legal duties and responsibilities. |
| Can be personally liable for breaches. | Can also be personally liable for breaches. |
Directors’ duties
Accepting a directorship may sound appealing, but it also creates significant legal responsibilities. Every company director must understand and comply with their obligations.
Australian company directors must exercise care and diligence, act honestly, act in good faith and always work in the company’s best interests. To do this properly, directors need a genuine understanding of the company’s operations, financial position and business activities.
Directors must also ensure the company can pay its debts as they fall due. If a company continues trading while insolvent, directors may become personally liable. Understanding the company’s financial records, liabilities and cash flow is therefore essential.
Another important responsibility is maintaining accurate financial and corporate records. Directors must also ensure that the Australian Securities and Investments Commission (ASIC) receives required notifications and company information within the relevant timeframes.
Importantly, every director has a personal responsibility to maintain proper company records. You cannot avoid liability simply because another director managed the business or because you had limited involvement.
When can directors become personally liable?
Directors can become personally liable in several situations. One of the most common occurs when they allow a company to continue trading while insolvent. This can expose directors to substantial financial liability as well as civil and criminal penalties.
Directors may also become personally liable if their breach of duty causes the company to suffer financial loss. In some circumstances, regulators may also commence civil or criminal proceedings.
The Australian Taxation Office (ATO) also has powers under the director penalty regime. Directors can become personally responsible for certain unpaid company tax debts and unpaid employee superannuation obligations. If a business employs staff, directors should regularly confirm that wages, tax obligations and superannuation payments are being made correctly.
Common situations where directors may be personally liable
| Situation | Potential Consequence |
|---|---|
| Trading while insolvent | Personal financial liability and possible civil or criminal penalties. |
| Breaching directors’ duties | Liability for company losses and regulatory action. |
| Unpaid tax or superannuation | ATO Director Penalty Notices and personal liability. |
| Poor record keeping | Compliance breaches and possible penalties. |
Other laws that affect company directors
Directors must comply with more than just the Corporations Act 2001. Several other Australian laws may also impose obligations and create personal liability.
For example, the Competition and Consumer Act 2010 regulates areas such as consumer protection, misleading conduct and competition law. Depending on the circumstances, directors can be held personally responsible for breaches.
Work health and safety legislation also places important responsibilities on directors. In many cases, directors must demonstrate they exercised due diligence to ensure the business complied with workplace safety laws. Limited involvement in the business is unlikely to excuse non-compliance.
Directors may also face proceedings under the Fair Work Act 2009 if the company fails to meet its workplace obligations.
Can a silent director avoid responsibility?
Simply being a director “on paper” will rarely protect you from liability. Australian courts generally expect every director to understand the company’s affairs and actively fulfil their legal duties.
In Deputy Commissioner of Taxation v Clark [2003] NSWCA 91, the court highlighted that failing to participate in company management is inconsistent with the responsibilities expected of company directors.
Likewise, relying entirely on another director’s advice may not satisfy your obligation to exercise reasonable care and diligence.
Key takeaways before accepting a directorship
- Every director has the same legal duties, regardless of their level of involvement.
- Silent directors can still become personally liable for company debts and legal breaches.
- Understand the company’s finances, operations and compliance obligations before accepting the role.
- Seek independent legal advice if you are unsure about your responsibilities.
Need legal advice before becoming a company director?
If your spouse, family member or business partner has asked you to become a company director, obtaining legal advice before accepting the appointment is a sensible step. Understanding your obligations early can help you avoid significant legal and financial risks later.
If you or someone you know needs advice about company directors’ duties or business law matters, please contact us on 07 5576 9999 or email [email protected].
