So … you want to be a Director?  What are the Dangers?

 

‘ASIC will not hesitate to disqualify company officers who disregard their obligations under the law’.

ASIC’s Deputy Executive Director of Consumer Protection,

Ms Delia Rickard - December 2006

 

In a recent landmark decision of the Federal Court, executives and directors of troubled property group Centro were found to have breached the Corporations Act by signing off on financial reports that failed to disclose billions of dollars of short-term debt. ABC Learning founder Eddy Groves and fellow executive Martin Kemp are due to face trial in the new year accused of breaching the Corporations Act. 

 

What do you need to beware of with respect to your duties as a Director or Executive of a Company?

 

Can You be a Director of a Company?

 

There are certain rules regarding whether someone is entitled to be a Director of a company.

 

If you:

 

< are an undischarged bankrupt; or

 

< are subject to a personal insolvency agreement or an agreement under Part X of the Bankruptcy Act 1966 that has not been complied with; or

 

< are subject to a composition under Part X of the Bankruptcy Act 1966 and final payment has not been made; or

 

< have been convicted of various offences such as fraud or offences which related to the previous breaches of your duties as a Director, or insolvent trading;

 

then in order to be appointed a Director of a Company you will require the Court’s consent.

 

Note - You cannot manage a Company if you are prohibited from being a Company Director or Secretary.  It is an offence to appoint ‘dummy’ Directors whilst you, as a disqualified Director manage and run the Company.

 

What are a Director’s Duties?

 

Part 2D of the Corporations Act 2001 details a Director’s duties to their Company.  One of the paramount duties of a Director is to discharge their duties and powers “in good faith, in the best interests of the Company and for a proper purpose”.  It is important when making decisions for your company that any personal interests you may have are disclosed.  The Company’s, shareholders’ and creditors’ interests should always take precedence over your own personal interests.

 

E.G. ASIC found that Mr Domenico Ferrara (a former FAI Director) had failed in his duty to separate his personal interests from the Company by using company funds to pay electricity, water bills, council rates, a speeding fine and his daughter’s wedding.  These payments occurred only three days before a liquidator was appointed to FAI.  Mr Ferrara was consequently banned from being a Director.

 

As a Director or Secretary of a Company you have a duty to:

 

< know what the Company is doing;

< keep accurate financial records of the Company’s activities;

< ensure that the Company can pay its debts on time and is solvent;

< not allow the Company to trade whilst insolvent;

< keep records of general meetings, Directors’ meetings, and any charges over the Company.

 

Financial records are needed to explain the Company’s financial position and performance.

 

Most Companies  have to lodge financial records every year with ASIC with the exception of a ‘small proprietary company’.  Records that related to the transactions of the Company must be kept.

 

These include, but are not limited to:

 

< General ledgers recording transactions, revenues, expenses, assets, liabilities and balance;

< Cash records - bank statements, deposit books, cheque butts, petty cash records;

< Debtors’ records - a list of debtors, their balances, delivery dockets and invoices;

< Creditors’ records - purchase orders, invoices, statements of received and paid, unpaid invoices, list of all purchases;

< Wages and superannuation records;

< Registers of property, plant and equipment;

< Inventory records;

< Investment records;

< Tax returns and calculations;

< Deeds and Contracts.

 

It is also normal for Companies to prepare statements regarding the company’s financial position, performance and cash flows.  These reports should be prepared monthly to keep an accurate record of what is going on in the Company.  All transactions should be documented and recorded accurately and completely.

 

One of the most common grounds for the disqualification of a Director by ASIC is for trading whilst insolvent.

 

A Company is deemed insolvent if it cannot pay its debts when they become due and payable.  As a Director you are required to ensure that the Company does not incur a debt when it is insolvent.  You must, on reasonable grounds, believe that the Company is able to pay a debt when it becomes due.  This is important because not only can you be banned from being a Director, but your personal assets as well as the Company’s assets may be seized to pay creditors.

 

Common indications that a Company is insolvent include, but are not limited to:

 

< low or negative cash flows;

< problems paying creditors on time, or meeting loan repayments;

< operating costs higher than profits;

< more liabilities than assets;

< difficulty keeping within overdraft limits;

< legal action taken by suppliers or other creditors for money that is owed.

 

As a Director you should not assume that the Company can trade out of the problem.  If the Company is experiencing any financial difficulty it is prudent to immediately consult with a professional.  It should be noted that there are substantial penalties, including criminal prosecution, which may be commenced against you as a Director.

 

If you are a Director of a Company you should never think of your role as one of ‘just sign here’.  Civil and criminal liabilities attach to Directors who act recklessly, are negligent and/or breach their duties.  It is important to maintain an active role in the business, keep all records and seek professional advice on issues so that you can make an informed decision.

 

ASIC takes breaches very seriously.  If you have any queries about how to best perform your duties as a Director contact our Corporate & Business Services Group for further information.

 

 

Link to printable version of this article

 

Link to ‘Centro’ Case (Australian Securities and Investments Commission v Healey [2011] FCA 717)

 

Link to other articles by MacGillivrays

 

MacGillivrays Corporate & Business Services 1300 369 581 or tonyn@macgillivrays.com.au.

 

 

PLEASE NOTE:  This article is not legal advice and our comments are of a general nature only.  This document is not to be relied on as substitution for proper detailed legal advice.  Liability limited by a scheme approved under professional standards legislation.

 

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