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Business & Commercial Law - Director's Duties To The Company

Date: June 21, 2007

Authors: LAC Lawyers

Director's personal liability can flow from:

  • Failing to act honestly in good faith, for a proper purpose, or with due care and skill;
  • Making improper use of confidential business information;
  • Conflict of interest;
  • The company trading while insolvent;
  • Company contracts made prior to the Company's incorporation;
  • The company providing financial assistance to it's directors or associates to buy shares in the company;
  • Improper use of business documentation, including cheques;
  • Specific provisions relating to the debts of trustee corporations; and
  • The payment of unlawful dividends from the company.

Trade Practices Act

Almost every aspect of business is affected by this legislation including:

  • competitive agreements;
  • Consumer protection;
  • Product liability;
  • Unconscionable dealing.

Occupational Health & Safety

  • Directors should be concerned about an organisational risk management culture.
  • Directors should be concerned about the advantages of establishing a strategic and organisational risk management culture.


INSOLVENT TRADING

Directors should be aware of their obligations in this area:

Section 588G of Corporations Act

Directors duty to prevent the company from engaging in insolvent trading

The duty contains five elements:

  • The person is a director at the time when the company incurs that debt [588G(1)(a)]
  • The company was insolvent at the time or became insolvent by incurring that debt, or by incurring at that time debts including that debt [588G(1)(b)]
  • At that time there were reasonable grounds for suspecting the company was insolvent or would become insolvent [588G(1)(c)]
  • The debt was incurred after 23 June 1993, being the commencement of Part 5.7B of the Act [588G(1)(d)]
  • By failing to prevent incurring the debt, the director contravenes Section 588G(2) where, at the time the director was aware that there are such grounds for suspecting, or a reasonable person in a like position in the company, would have been aware that the company was insolvent.

The Proof

Even if a company is insolvent, it must be established that there were reasonable grounds to suspect that the company was insolvent or would become insolvent before a director is held liable.

Under Section 588G the test requires that whatever is "suspected" must be based on reasonable grounds and imports into this section an objective test for suspicion.

The three methods used in court to prove insolvency are:

  • Statutory presumption
  • Direct evidence
  • Opinion evidence by use of an expert report.

Presumption of Insolvency (Section 588G)

The presumptions contained in 588G operate to facilitate liquidators, creditors or the ASIC in establishing solvency at a particular time.

The presumption does not operate in criminal proceedings.

Civil Penalties

  • The court may disqualify a person from managing a corporation or imposing a pecuniary penalty order up to $200,000.00.
  • The ASIC, a commission delegate or some other person authorised in writing by the Minister can apply for a civil penalty order.
  • A director may be liable for criminal proceedings by the ASIC or the Commonwealth Director of Public Prosecutions if they contravene a civil penalty provision (Section 588G). 

A director will be convicted of such an offence where it is proven that the contravention was carried out in such circumstances that establish the following:

  1. Knowing, intentional or reckless conduct, whose purpose is to
  2. either:
    1. to dishonestly intend to gain, whether directly or indirectly, an advantage for that or any other person; or
    2. intending to deceive or defraud someone.

Penalty for Director guilty of an offence is a fine of $200,000.00 or 5 years jail.

Defences

A director can avail himself or herself of one of four statutory defences contained in Section 588H and can be absolved from liability if:

  • There were reasonable grounds to expect the company was solvent
  • There were reasonable grounds to rely on the information provided by another person that the company was solvent
  • If at the time debts were incurred the director can establish illness or other good reason
  • The director took all reasonable steps to prevent incurring the debt.


Compensation Against Directors

An application initiated by the ASIC/DPP to pay compensation to the court made in those circumstances may be enforced as though it was a judgment of the court.

However, proceedings under this section may only be begun within 6 years after the commencement of the winding up.

Liability of Holding Company

A holding company is liable for the debts of a subsidiary if a holding company has permitted the subsidiary to trade whilst insolvent (Section 588V). 

The Trade Practices Act

The Trade Practices Act claims to enhance the welfare of Australians by:

  • Promoting competition and fair trading; and
  • Protecting consumers.

The Act prohibits certain business conduct so that both consumers and businesses enjoy benefits.  In general, a business must not:

  • Mislead, deceive or act unfairly or unconscionably in business (discussed in section 2); or
  • Behave in an anti-competitive way (discussed in section 3).

The Act's reach is very wide. It impacts almost every aspect of business activity in Australia. Anyone who has contact with consumers, suppliers, business associates or competitors should be aware of the Act.

The ACCC

The ACCC administers and enforces the Trade Practices Act throughout Australia. It's a federal authority.

The ACCC investigates and prosecutes alleged breaches of the Act.

The ACCC can force employees to provide information and documents, and to answer questions in the course of an investigation .

If you are approached by the ACCC to give information or to answer questions, it is essential you refer the matter immediately to your lawyer.

Conclusion

The message is that Directors should always be mindful of their corporate responsibilities otherwise they could become personally liable. If you are concerned about the traps and pitfalls of acting as a director, contact LAC Lawyers for professional advice.

Contact us now for Fast, Accurate and Timely legal advice

Phone LAC Lawyers on NSW 1300 799 888 or VIC 1300 734 638 or send us an email

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