Company Directors – Know Your Obligations And Duties

What if your company can’t pay its debts?

There are serious legal ramifications for trading while a company is ‘insolvent’. Directors and company secretaries are obliged to prevent their company from taking on new debt if they suspect that their company will be unable to meet its existing debts.

Failure to prevent a company from incurring further debts can be fatal for company secretaries and directors. Not only could you be personally liable to liquidators or creditors if you allow your company to trade where there are visible signs of financial difficulty, you may also face civil or criminal action.

Common signs of financial difficulty are:

• Difficulty paying trade suppliers and other creditors on time;
  
• Difficulty meeting loan repayments on time or keeping within overdraft limits;
  
• Legal action taken, or threatened, by trade suppliers or other creditors over money owed to them;
  
• Low operating cash flow from the main business; and
  
• Trade suppliers refusing to extend further credit to the company.

What can you find out about other companies?

ASIC’s information sheet, Don’t get Burned, provides useful tips on how to avoid shonky operators and fly-by-night businesses. Their website allows you to confirm the identity of the company you are dealing with, and ascertain if it is up-to-date with its fees and documents.

This simple enquiry can safeguard your business from dealing with companies that are experiencing serious financial difficulty.

Can anyone be a director or secretary?

It is illegal to act as a director or secretary (or manage a company) without court consent if you:

• Have been declared bankrupt; or
  
• Have been convicted of various offences such as fraud, insolvent trading or a breach of your director duties.

If you have been convicted of one of these offences, you are prohibited from managing a company for five years after your conviction. If imprisoned, you are not allowed to manage a company for five years after your release from prison.

Convictions of bankruptcy or other relevant offences during your appointment as director or secretary may also result in your automatic dismissal.

If you are not allowed to be a company director or secretary, you are not permitted to manage a company. There are serious legal consequences for setting up dummy directors when you effectively manage the company.

What is the role of a director?

Directors are generally responsible for controlling the company’s business. The rules setting out the powers and functions of directors’ are usually encompassed in the company’s constitution.

Directors must be completely up-to-date with what the company is doing. This includes:

• Knowing how any proposed action will affect your company’s business performance, particularly if it involves a considerable sum of the company’s money;
  
• Getting legal and accounting advice where you need more details to make an informed decision;
  
• Taking an active role in director’s meetings; and
  
• Questioning managers and staff about how the business is performing.

Avoid a company that offers to make you a director or secretary on the basis that ‘you won’t have to do anything’ and ‘just sign here’. There is a danger that you could be exposing yourself to many legal liabilities.

What are the legal obligations of directors?

As a director, you must:

• Act honestly and carefully;
  
• Know what your company is doing;
  
• Take extra care when operating the business because it may involve handling other people’s money;
  
• Make sure your company can pay its debts;
  
• Ensure that your company keeps proper financial records;
  
• Act in the company’s best interests;
  
• Use any information obtained through your position properly and in the best interests of the company. It is illegal to use that information to gain, directly or indirectly, an advantage for yourself or for any other person or harm to the company.

Personal interests that might conflict with your duty as director must generally be disclosed at a director’s meeting.

What happens to dishonest directors?

Dishonest, reckless company officers may be sent to prison, pay hefty fines or be forced to pay damages.

As the company watchdog, ASIC will investigate corporate crime and may take various steps against directors who fail in their duties.

What do you have to tell ASIC about your company?

Every year you must:

• Pay your company’s annual review fee;
  
• Pass a solvency resolution; and
  
• Keep ASIC informed of changes in your company details.

Do you have to keep records and registers?

Directors are personally responsible for maintaining proper company records.

Directors must ensure that the company keeps up-to-date financial records that:

• Explain the company’s financial position and performance; and
  
• Correctly record and explain its transactions.

Small proprietary companies (defined by the Corporations Act) may not have to prepare annual financial reports, but must retain financial records for managing and measuring the company’s progress, tax and financing capacity.

Large proprietary companies, public companies and non-profit public companies must prepare financial reports, have them audited, and lodge them with ASIC.

What financial records does a company have to keep?

A company is generally expected to keep the following financial records:

• General ledgers recording all the company’s transactions and balances;
  
• Cash records e.g. bank statements, deposit books and petty cash records;
  
• Debtor and sales records e.g. delivery dockets, invoices and statements, lists of debtors and their balances and lists of all sales transactions;
  
• Creditor and purchases records e.g. purchase orders, invoices and statements received and paid, lists of creditors and lists of all purchases;
  
• Wages and superannuation records;
  
• A register of property, plant and equipment showing transactions and balances in relation to individual items;
  
• Inventory records;
  
• Investment records e.g. contract notes, dividend or interest notices;
  
• Tax returns and calculations e.g. income tax, group tax, fringe benefits tax and GST returns and statements;
  
• Deeds, contracts and agreements.

Company housekeeping records and registers etc.

Company officers are responsible for ensuring that the company attends to basic ‘housekeeping’ matters, and complies with the Corporations Act.

When a company is founded, you must:

• Register the company name and obtain an Australian Company Number (ACN); and
  
• Establish a registered address.

Company officers must also:

• Publicly display the company name at the registered office; and
  
• Display the company name, the words ‘Australian Company Number’ (or ‘ACN’) or ‘Australian Business Number’ (or ‘ABN’) and the relevant number on:
  
  • The common seal (if one is used);
    
  • Every public document of the company;
    
  • Every cheque or promissory note; and
    
  • All documents lodged with ASIC.

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