Corporations Act 1993: 5 Board Responsibilities

From ESG reporting to remaining solvent, the Corporations Act 1993 provides guidance for how the board should act. Here’s a look at some of your responsibilities. 

Act in Good Faith

When you’re on the board of directors for a corporation, you strive to build trust with the public and your customer base. This means acting with integrity at all times. The Corporations Act 1993 requires the board to act in good faith and to meet certain requirements that affect public trust. Here are a few things you need to keep in mind:

• Directors must act honestly and in good faith.
• Decisions should serve the company as a whole, not just certain shareholders or personal interests.

Exercise Care, Diligence, and Skill

Board members hold significant influence over how a company operates and the level of risk it takes on. While every corporation must accept a degree of risk, it’s essential to balance that risk against potential rewards. The Corporations Act 1993 aims to ensure boards carry out their duties with the same care and diligence expected of any reasonable board. 

Here are some of the key details:

• Boards must perform duties with care, diligence, and skill that a reasonable director would exercise under the same circumstances.
• This means proper oversight of management, risk awareness, and informed decision-making.

Solvency Test 

You’re accountable to your shareholders, who expect to receive dividends from time to time. Share buybacks are one way corporations can deliver value as publicly listed companies. However, some organisations may attempt to pay dividends or carry out a share buyback without ensuring they can meet their regular financial obligations or maintain ongoing solvency.

A hallmark of Corporation Act 1993:

• Before authorising dividends, share buybacks, or distributions, the board must ensure the company:
  • Liquidity Limb: Can pay its debts as they fall due in the normal course of business
  • Balance Sheet Limb: Has assets greater than liabilities (reasonable valuation)
• Directors must formally sign off on solvency resolutions.

Duty Not to Trade Recklessly 

A board of directors holds some control over how the company’s shares are traded. It’s important they avoid reckless trading that could lead to debt or prevent the company from paying its creditors on time. Boards can influence trading activity by issuing additional shares to the market or conducting share buybacks.

The Corporations Act 1993 holds some control over this, such as:

• Boards must not allow the business to be carried on in a way that is likely to create substantial risk of serious loss to creditors.
• This aligns with the Australian concept of “insolvent trading,” but focuses more on reckless behavior.

Disclosure and Record-Keeping

The New Zealand Corporations Act 1993 ensures that boards complete record keeping and disclosure in a uniform way. This makes it easier for the general public to review a business’s records. It also ensures that companies provide essential information to the NZ Companies Office. 

• Maintain accurate company records (share register, minutes, resolutions).
• Ensure statutory filings with the NZ Companies Office are up-to-date.
• Directors must disclose conflicts of interest, and, in some cases, shareholdings.

Consequences of Breach

When writing the New Zealand Corporations Act 1993, they made sure to add consequences for companies that fail to meet regulations. Board members can be held directly liable for breaches of their duties. This makes it even more important that you meet legal compliance. Boards often consult legal teams, law firms, and their general counsel to avoid being non-compliant. Here are a few of the consequences:

• Personal Liability: Directors can be held personally liable if duties are breached.
• Compensation Orders: Courts can order directors to compensate for company losses. 
• Disqualification: Courts may ban individuals from being directors.
• Criminal Penalties: Apply in cases of serious dishonesty or fraud.