Insolvent

Director duties

There are numerous and important legal responsibilities imposed on directors of companies under the Corporations Act 2001 and other laws, including the general law.

Of these director duties, some of the most significant are contained in Chapter 2D of the Corporations Act:

  • to exercise the degree of care and diligence that a reasonable person might be expected to show in the role – the business judgment rule (s.180).
  • to act in good faith in the best interests of the company and for a proper purpose (s.181)
  • to not improperly use their position to gain an advantage for themselves or someone else, or to the detriment to the company (s.182)
  • to not improperly use the information they gain in the course of their director duties to gain an advantage for themselves or someone else, or to the detriment to the company (s.183)
  • to lodge information with ASIC (s.188)

but there are others, including to:

  • to avoid conflicts of interest between the interests of the company and theirpersonal interests and to reveal and manage conflicts if they arise (s.191)
  • to take reasonable steps to ensure that a company complies with its obligations in the Corporations Act related to the keeping of financial records and financial reporting (s.344)
  • to ensure that a company does not trade whilst insolvent or where they suspect it might be insolvent (eg, if it is unable to pay its debts as and when they fall due) (s.588G)
  • if the company is being wound up, to assist the liquidator and provide accurate details of the company’s affairs.

Directors can also be liable for unpaid taxation obligations and unpaid superannuation monies – for which the ATO can issue Director Penalty Notices.

Failing to comply with director duties can result in criminal sanctions, fines, disqualification from acting as a director and other consequences, such as breach of contract such as obligations under a Directors & Shareholders Agreement.

People can be responsible as directors even if not formally appointed

What many people don’t know is that the term “director” is defined in section 9 of the Corporations Act to include a person:

  • who is appointed as a director (or alternate director), regardless of the name given to their position; and
  • even though not validly appointed and recorded at ASIC as a director:
    • who acts in the position of a director (also known as a ‘de facto director‘); or
    • whose instructions or wishes the appointed directors are accustomed to act in accordance with (also known as a ‘shadow director’)

Commonly used terms for the titles of ‘director’ include ‘non-executive director‘, ‘executive director‘, ‘managing director‘, ‘independent director‘ and ‘nominee director‘.

Often, businesses give titles to employees rather than pay rises. Similar considerations apply to partnerships, where some partners are ‘salaried partners‘, not ‘equity partners‘ so they take home a salary rather then enjoy the fruits of the business. What these ‘salaried partners‘ (in the same vein as ‘non-executive directors‘) often fail to understand or appreciate is that they are holding themselves out as directors or partners of the business and will have full responsibility as such if something goes wrong, such as an insolvency.

How to meet the responsibilities

Those with key roles in any business, regardless of its legal form, you should:

  • understand your legal obligations and make compliance with them part of your business
  • keep informed about your business’ financial position and performance, ensuring that it can pay its debts on time and keeps proper financial records
  • give the interests of the business, its stakeholders/owners and its creditors top priority, which includes acting in the business’ best interests (even if this may not be in your own interests)
  • use information you get through your position properly and in the best interests of the business
  • get professional advice or more information if you are in doubt.

FURTHER INFORMATION

Craig Pryor is principal solicitor at McKillop Legal. For further information in relation to Corporations Act or corporate governance issues or any business or commercial law matter, contact Craig Pryor on (02) 9521 2455 or email craig@mckilloplegal.com.au

This information is general only and is not a substitute for proper legal advice. Please contact McKillop Legal to discuss your needs.

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Do you have customers that owe you money?

WHAT OPTIONS ARE THERE TO CHASE DEBTS?

Where a customer has not complied with the terms on which goods or services have been provided, in that they have failed to make payment as and when required and despite repeated requests, it can often be of assistance for a demand letter to be sent by a lawyer.

The letter of demand will usually require payment in full by a defined time or may propose a payment plan with payment by instalments.

McKillop Legal is often called upon to advise in relation to debt recovery issues. We find that a strongly worded demand, clearly setting out the situation and seeking payment within a reasonable period usually results in payment.

There are various options available for business owners to recover moneys due.

If a letter of demand does not result in payment, there are various options available.

Where the debt is due by a company and the debt is more than $2,000 and it has not been disputed, a Creditor’s Statutory Demand can be issued under the Corporations Act giving the company 21 days to either pay the debt or to come to an arrangement to you for payment of the debt, failing which the company is presumed at law to be insolvent and can be wound up on application to the Supreme Court.

If an individual or partnership owes the debt, a company owes the debt and it is less than $2,000 or if a company debtor disputes the debt, then usually the commencement of proceedings will be necessary (and you would need to weigh up the costs and benefits of doing so to make a commercially sensible decision).

If the debt is over $5,000 and the debt is the subject of a judgment of a court, you can issue a Bankruptcy Notice. A Bankruptcy Notice provides for payment of the debt or a satisfactory arrangement for payment of the debt to be made within 21 days, failing which an “act of bankruptcy” has been committed, entitling you to commence proceedings in for a bankruptcy/sequestration order.

Options for enforcement of judgments also include:

  • Garnishee orders
  • Write of Execution over property – where the Sheriff sells personal property, land etc
  • Instalment orders

FURTHER INFORMATION

Craig Pryor is principal solicitor at McKillop Legal. For further information in relation to business succession, estate planning, litigation and dispute resolution or any commercial law matter, contact Craig Pryor on (02) 9521 2455 or email craig@mckilloplegal.com.au