The duties of both directors and officers are outlined in each company’s articles of incorporation, however statutory duties are further detailed in the Business Corporations Act (BCA). Under the Act, every director and officer is required to:
- Honesty and company’s best interests: Act honestly and in good faith with respect to the best interests of the company;
- Care and diligence: Exercise due diligence, care, and skill that would be expected of a reasonable prudent individual in similar circumstances;
- Regulations: Act in accordance with the BCA and relevant regulations to companies and businesses; and
- Articles: Act in accordance with the company’s Articles of incorporation.
Honesty, Good Faith and Company’s Best Interests?
The duty of honesty requires directors and officers to be as open and truthful as possible and especially with the other directors and colleagues. It strictly prohibits directors and officers of a company to obtain secret profits or act fraudulently.
The duty of good faith and in the company’s best interests is better understood as the duty of loyalty. Directors and officers must act and make decisions that serve the company positively in the long term. They are prohibited from acting improperly or for self serving collateral purposes.
Care, Diligence and Skill of Reasonable Prudent Individual
Directors and officers must demonstrate a duty of care based on common sense by acting deliberately and cautiously. They must assume the responsibility to foresee all possible consequences of all actions and decisions. The expected level of skill and care varies according to the directors’ background, the significance of the decision, the time available to make the decision, and other relevant factors.
The duty of due diligence involves making rational inquiries, similar to what an ordinary person would do when handling their own affairs. Examples of fulfilling these duties may include the following:
- Attending meetings;
- Relying on other directors;
- Relying on officers and professionals; and
- Relying on outside experts.
Qualifications to Become a Director or Officer
Under the BCA, certain individuals are not qualified to become or act as directors and/or officers:
- Individuals under the age of 18;
- Individuals deemed incapable of handling their own affairs;
- Individuals who are undischarged bankrupts;
- Individuals convicted of an offence in the past five years concerning the promotion, formation, or management of a corporation or unincorporated business; and
- Individuals convicted of fraud.
A Duty to Whom?
Directors and officers owe their fiduciary duties to the company. However, these duties also extend to shareholders, creditors (subject to limitations), and employees in certain circumstances. These duties are intended to safeguard the interests of the company and ensure that directors and officers carry out their duties with care, loyalty and transparency.
How Northam Can Help
Our team of Business and Corporate law professionals can guide you through your responsibilities as a director and officer, including the consequences for breaching these duties. We also provide assistance with the incorporation process, including and drafting and reviewing of your company’s Articles of incorporation. Whether you’re starting a new business or need advice on your ongoing corporate responsibilities, Northam Law can ensure that your company is compliant with the law.