by Andrea Lyons
Directors and company secretaries have a number of responsibilities under the Corporations Act. A breach of these duties may lead to the directors incurring personal liabilities, both civil and criminal.
These duties include obligations to keep records (including financial records) and to pass annual solvency resolutions. It is vital that directors keep themselves informed about the company’s financial solvency. Keeping proper accounts and understanding financial reports prepared by its accountants/business advisors will assist directors to meet this obligation.
A director should be concerned if at the time the company incurs a debt when it is insolvent or, if by reason of it incurring the debt, it will become insolvent.
A company is insolvent if it is unable or may be unable to pay its debts as they fall due. The test applied in this case is that of a reasonable person in the position of the director and whether it would have been reasonable for that person to expect the company was or would remain solvent.
If a director allows a debt to be incurred in these circumstances, there is a risk that the director could be made personally liable for that debt.
In addition, directors must exercise their powers and discharge their duties:
- with the degree of care and diligence that a reasonable person would exercise;
- in good faith in the best interests of the company and for a proper purpose;
- in such a way that they do not use their position or information obtained, by reason of their position, to gain an advantage for themselves or someone else or cause detriment to the company.
Directors may commit criminal offences if they are reckless or intentionally dishonest and fail to exercise their duties in good faith, in the best interests of the company and for a proper purpose.
Except in the case of sole director companies, directors should always be mindful that if they have a material personal interest in a matter, they may have a duty to disclose that interest to the other directors. There are numerous exceptions to this duty of disclosure, but as a general rule a director should act with caution when there is a possibility that personal interests may conflict with the interests and affairs of the company.
If you require assistance or guidance in relation to the management of your director’s obligations, we at EASE, Cloud Accountants, would be happy to assist you. In particular, there are many reports produced by XERO that can help you monitor your company’s solvency position and provide other useful information about the financial health of your company.