Being the director of a company isn’t all about corporate lunches and overseas conferences. A director is much like being the captain of a ship. They are responsible for navigating a company in the right direction, and leading the many teams and departments to make sure they stay on course.
To make sure the ship stays afloat, directors have a duty to understand and comply with Australian regulatory requirements and legal obligations, including preventing a company from trading whilst insolvent. They need to ensure the company keeps proper financial records and assess the company’s financial performance through effective internal auditing processes. If a director has any concerns about the company’s financial viability, they need to seek advice from an appropriate advisor in a timely fashion.
What are some of the key duties of a director?
The Australian Securities and Investments Commission (ASIC) considers directors to be the gatekeepers of our financial system, and if performing properly, a director will make sure investors are confident and informed, and our markets are fair, orderly and transparent.
Duty not to trade whilst insolvent
A director has a positive duty to prevent insolvent trading under s588G of the Corporations Act 2001 (Corporations Act) and preventing the company from incurring debts if the company is already insolvent. They must also be aware of the company’s financial position on a regular basis.
Duty to keep books and records
A company must keep 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 fulfils this requirement contravenes the Corporations Act.
*During the 2013 – 2014 Financial Year, a total of 18,195 directors were reported to ASIC for misconduct. Of these, 5,806 directors were reported for insolvent trading under Section 588G of the Corporations Act, and 3,819 directors were reported under Sections 286 & 344 – Obligation to keep financial records. Despite the number of directors being reported for misconduct, there were no recorded prosecutions as a result of insolvent trading.
Directors’ duties – how to prevent trading whilst insolvent
In a recent speech from ASIC Chairman Greg Medcraft, he reinforced the message about what ASIC expects from directors in their oversight roles. Mr Medcraft referred to a case ASIC won against the former directors of the property company Centro. This case highlighted a number of areas ASIC believes would be applicable to all directors in ensuring they are performing their duties effectively, including:
- Scepticism: directors must question the information provided to them. There is no defence for wilful blindness.
- Accounting knowledge: directors are expected to have financial literacy and basic accounting knowledge. That is, be able to read a balance sheet and profit and loss statement.
- Accountability and control: it is up to directors to ensure the executive has systems, protocols and controls to ensure sound corporate governance. It is about having the right level of effective risk management.
- Culture: directors should also ensure that their stewardship drives the right compliance culture in their organisation.
Consequences for insolvent trading
There are a number of consequences for insolvent trading, including civil penalties, compensation proceedings and criminal charges.
- Civil penalties against directors could result in penalties of up to $200,000.
- Compensation proceedings for amounts lost by creditors can be initiated by ASIC, a liquidator or a creditor against a director personally. There is no limit to the amount of compensation penalties. This can result in the personal bankruptcy of a director, which would disqualify that director from continuing as a director or managing a company, while bankrupt.
- If the insolvent trading was found to be a result of dishonesty, that director may be subject to criminal charges, and a fine of up to $200,000 or imprisonment for up to 5 years, or both.
As the gatekeepers of our financial system, a director needs to be aware of their duties under the Corporations Act, and operate according to their corporate governance requirements. They have a responsibility to shareholders, investors, company employees and to ASIC to understand, create and monitor effective regulatory controls to prevent trading while insolvent.
(Information from ASIC website)
SV Partners offers a range of corporate and personal insolvency advice and solutions. If you have any issues or concerns about the current financial situation of a client, please contact one of our experts on 1800 246 801.
*Statistics obtained from 2013-2014 ASIC Insolvency Statistics Series 3.1