The modern business environment requires a high level of skill and ethics to be practised by directors and officers of any size company. Tough economic conditions impose stringent obligations on directors and officers.

Directors and officers who ignore these obligations quite often find themselves facing significant fines, liability, and/ or prohibition from holding the role of director.

General obligations imposed by the Corporations Act 2001 (Cth)
on directors and officers ofcompanies

• Exercising powers and duties with the care and diligence that a reasonable person would exercise. This includes the director taking steps to ensure he/she is properly informed about the financial position of the company.
• Exercising powers and duties in good faith in the best interests of the company and for a proper purpose.
• Not to improperly use the position as director to gain an advantage personally or for someone else, or to cause detriment to the company.
• Not to improperly use information obtained through the position to gain an advantage personally or for someone else, or to cause detriment to the company.

As well as these general duties, directors have a positive duty to prevent a company from incurring a debt if the company is insolvent or will become insolvent by incurring that debt. A company is insolvent if it is unable to pay all its debts when they are due and payable. This means that before the company incurs a new debt, the director must consider whether he/she has reasonable grounds to suspect that the company is insolvent or will become insolvent as a result of incurring the debt.

A company must keep adequate financial records to correctly record and explain transactions and the company’s financial position and performance. A failure of a director to take all reasonable steps to ensure a company complies with these requirements contravenes the Corporations Act.

A director is obliged to be constantly aware of the company’s financial position.
An understanding of the financial position of the company only at the time that a director signs off on the company’s financial statements is insufficient.

Does the director:

• Have information at their disposal to regularly form the view that the company is solvent?
• Monitor the financial affairs of the company and make sufficient inquiries into its financial affairs on a regular basis?
• Rely on a third party to provide information about the solvency of the company and, if so, does the director make diligent and timely inquiries of them?
• Understand the indicators of insolvency that a reasonable person should take into account in determining whether the company is insolvent?
• Take positive steps to confirm the company’s financial position and realistically assess the options available to deal with any of the company’s financial difficulties?

Is the company:

• Continually making losses?
• Unable to realise current assets and facing cash flow difficulties?
• Not paying creditors in accordance with its terms?
• Not paying tax and superannuation liabilities?
• Subject to accumulating debt with excess liabilities over assets?
• Defaulting on loan or interest payments?
• Subject to increased monitoring and/o rinvolvement by its financier?
• Experiencing difficulties in obtaining finance?
• Entering into instalment arrangements to repay creditors including the ATO?
• Subject to judgement debts?
• Disorganised in its internal accounting procedures?
• Deficient in financial records?
• Losing key management personnel?

Breaches of the Corporation Act by directors of companies may result in personal
liability. Serious breaches may also result in criminal liability.

Insolvent trading

If some or all of the following events are present in a company and the company is subsequently placed into liquidation, then the director may be at risk of
prosecution by a liquidator.

• Overdue Commonwealth and/or Statetaxes
• A poor relationship with its financier,including an inability to borrow further funds
• No access to alternatefinance
• An inability to raise further equity capital
• Continuing losses
• A liquidity ratio below 1
• Suppliers placing the company on cash on delivery (COD) or otherwise demanding special payments before resuming supply
• Creditors remaining unpaid outside of trading terms
• Issuing post-dated cheques
• Dishonoured cheques or electronic payments being returned unpaid
• Special arrangements with selected creditors
• Receipt of solicitors’ letters, summonses, judgements or warrants issued against the company
• Payments to creditors of round sums which are not reconcilable to specific invoices
• An inability to produce timely and accurate financial information to display the company’s trading performance and financial position and make reliable forecasts.

If the company fails to meet a PAYG withholding, GST or SGC liability by the due date,the director automatically becomes personally liable for a penalty equal to the unpaid amount. When a PAYG withholding, GST or SGC liability remains outstanding, the ATO may issue a Director Penalty Notice, which is necessary to start legal proceedings to recover thepenalty.Even without issuing a notice, the ATO can collect the penalty by other means, such as withholding a tax refund.

Read more ...