25 Jan Are You In Breach Of Your Duties As A Director Of Your Company?
There are over 2 million businesses in Australia and more than 700,000 of them are companies.
The vast majority of these are proprietary limited companies running small to medium enterprises.
Each of these companies is run by at least one director, but normally there are 2 or more directors of companies.
You may well be one of them and perhaps you decided to establish your company to run your business, on the advice of your accountant for tax and asset protection purposes.
Corporate veil no more
A company is a separate legal entity to its directors and shareholders and it used to be said a long time ago that a director could hide “behind the corporate veil” of the company and escape liability.
However, the landscape has changed in the last 50 years and increasingly so in the last 15 years with increased obligations placed on directors of companies whereby they may be exposed personally to the regulators, creditors and even the individual shareholders and employees of the company (if different to the directors of the company).
There are numerous duties placed on directors which are governed by the rules of the company (commonly called “the Constitution”), statute (principally the Corporations Act 2001 but also the various tax and superannuation Acts which give the Australian Taxation Office extensive powers to penalise directors for breaches of their companies in relation to compliance issues) and, in general terms. what lawyers call “the common law” (principles based on decisions handed down by the Courts over the years which may or may not be enshrined in statute).
Different types of duties
- to act in good faith in the interests of the company;
- not to act for an improper purpose;
- to be careful and diligent;
- to avoid conflicts of interest;
- to not make improper use of position;
- not to make improper use of information; and
- perhaps most critically in the current economic climate, not to trade while insolvent.
A company is trading insolvently when it is unable to pay its debts as and when they fall due.
This may be difficult for you to accurately assess at any given time given the ebb and flow of business. It is very important that if you suspect that this may be the case that you firstly seek financial advice (for example from your accountant), then legal advice from us, and depending on what we advise, the advice of an insolvency practitioner.
For the Corporation Act imposes liabilities on you if you allow your company to incur a debt at a time when you are aware, or could reasonably suspect that, your company was, or may become as a result of incurring the debt, insolvent.
Worse still, you will be deemed to have committed an offence if at the time the debt was incurred you actually suspected that the company was insolvent (or would become insolvent by incurring the debt) and your failure to prevent the debt being incurred was dishonest.
It is crucial that in running your business as a company, no matter how large or small, that you are aware of your financial duties not only for the commercial health and well-being of your company, but to protect individuals, other businesses, statutory authorities and the like who come into commercial contact with, and may be affected by, your company.
These duties include:
- monitoring both financial and non-financial performance;
- ensuring the company keeps accurate financial records;
- ensuring that that the Australian Securities and Investments Commission (ASIC), the main regulator of companies in Australia, is kept up-to-date with details all current directors and primary business address;
- ensuring that the company files appropriate tax returns;
- assessing business risks and taking out appropriate insurances;
- maintaining current knowledge of occupational health and safety matters.
What if you breach your duties as a director?
Fines and civil penalties may apply for breaches of duty imposed by the relevant Federal Court.
A director may also be liable to compensate the company, and the director may also be disqualified from holding office of the civil penalties imposed.
Worse still, criminal penalties may be appropriate in some circumstances where there has been a serious breach by the director, for example when the director is acting dishonestly or fraudulently.
Possible fines and penalties include:
- Personal fines up to $200,000;
- disqualification from acting as a director;
- imprisonment of up to 5 years, a fine of up to $200,000 or both for insolvent trading; and
- increasingly, actions by shareholders, creditors and even employees claiming personal liabilities.
Running a business in today’s climate is very challenging, especially as a director of a company given the many regulations and duties imposed on directors.
It is good business practice, and prudent personal and commercial risk management, to seek financial and legal advice at any time when the company is in financial distress or is faced with an issue which may have an adverse effect on the company or persons or authorities outside of the company.