A Director’s Duties – Skill, Care & Diligence (Part 2)

November 9, 2016

Directors have a duty to exercise a reasonable degree of care and diligence. As a director of a company, you must make decisions and undertake tasks with the care and diligence a reasonable person would be expected to take if they held that same position in that same company.

This does not mean that any time a company fails the directors have not fulfilled their duties. Consideration is given to the fact that business is risky and despite the best efforts of everyone involved, sometimes it just does not work out or mistakes are made.

When making decisions as a director, to prevent falling foul of this duty make sure you have:

1. informed yourself about the subject matter; and
2. made a rational business decision in good faith and in the best interests of the company.

As a director you are not expected to undertake every task of the company and may employ and delegate certain tasks to others – for example accounts and supervision of other employees. However, as a director you must put yourself in a position that allows you to guide and monitor all of the company’s activities, even those you have delegated to others.

Often we see family companies that have directors who no longer have any involvement in the day-to-day operations of the business of that company. These directors will be exposed to the same level of risk as the directors making the decisions.

All directors have a positive obligation to exercise care and diligence to ensure the company is solvent and complying with the obligations imposed on it by many different pieces of legislation. It is not a defence for a director to say they were not involved in the day to day operations or had delegated that aspect of the company’s operations to another director or employee.

So if your company has directors that are not involved in, or kept informed of, the company’s activities, that person should consider retiring as a director to protect them from the associated risks.

Read Part 3 here

Read part 1 here