No such thing as a silent director

The statutory directors' duties and recent case law developments make it clear that the idea of being a "silent director" is a furphy, warns Jennifer Barry, a solicitor at Lovegrove Solicitors.

She says the concept of a "silent director" is well known. It's the idea of a director who is merely in the background, not closely involved in the company and who does not participate or have intimate knowledge of the day-to-day activities of the business.

Barry says some may think that a "silent director" does not have the same obligations to the company as a non-silent director and is not liable for the same duties under the Corporations Act 2001. "This is both untrue and an extremely risky notion for the director involved to have."

"Under the Corporations Act, all directors, both executive and non-executive, are bound by a number of directors' duties. These duties impose obligations on directors to act in the best interests of the company, in good faith and for a proper purpose. These provisions apply equally to all directors, 'silent' or otherwise," says Barry.

Section 181 of the Corporations Act imposes an obligation on directors to exercise their powers and discharge their duties "in good faith in the best interests of the corporation" and "for a proper purpose".Recent case law has further expanded the requirements of directors in relation to their duties to the corporation, particularly in relation to the director's financial knowledge of the company, says Barry.

In the case against Centro directors and executives – Australian Securities and Investments Commission v Healey (2011) – Justice Middleton held that a director must "take a diligent and intelligent interest in the information available to him" and to "apply an enquiring mind to [their] responsibilities".

"It is clear that directors are no longer able to merely rely on the advice of advisers, such as accountants, or to claim that as they are a 'silent director' they have no requirement to keep abreast of the company's financial situation," says Barry.

"Directors must be careful to avoid making any assumptions that they are a 'silent director' as even if they are not involved in the day-to-day activities of the company, they can still easily fall foul of the duties of section 181 of the Corporations Act and the penalties for breach can be severe.

"Barry warns that section 588G of the Corporations Act also imposes an obligation on directors to prevent insolvent trading by the company. A director contravenes this section if he or she fails to prevent the company from incurring the debt and at the time the debt is incurred, is aware that there are grounds for suspecting that the company is insolvent, or likely to become insolvent, or that a reasonable person in that position would been aware of the insolvency or likely insolvency.

Although there are some defences to section 588G, she says being unaware of the affairs of the company because a director believes he or she is a "silent director" is not one of them.

"Becoming a company director is a serious undertaking that should not be done lightly," says Barry. "The duties of directors towards their company are strict and the penalties for breaching those duties can be severe. Before considering becoming a company director, it is essential to consider whether you will be able to devote adequate time to the position and, if necessary, seek legal advice to obtain a thorough understanding of the duties that accompany the role of director."