Corporate Responsibility – Directors Duties

26 Aug 2016

Many building practitioners (and other individuals in business) use companies from which to conduct their business.

Companies enjoy a special status in society: they are apart from natural persons (individuals) and partnerships the only other entity that enjoys legal status meaning that companies can enter into transactions, take legal proceedings and even open bank accounts in their corporate name or identity.

Companies also in many cases enjoy limited liability, which is a mechanism that can effectively be used in financial planning and risk aversion.

However, in using a company as a business vehicle the duties and responsibilities of office holders (directors and secretaries) should not be under-estimated.

Directors must:
Be honest and careful in their dealings at all times;
Know in a responsible sense what your company is doing;
Ensure the handling of other people’s money by the company is secure;
Ensure that company is trading in such a way that its debts are paid when due;
Ensure the company keeps proper financial records and complies with ASIC and ATO and other statutory regulatory (e.g. superannuation) requirements;
Act in the company’s best interests;
Use any information obtained for and in the best interests of the company;
Do not conflict ones own interests with those of the company.

Whether your company is a single director company or a multi director company your responsibilities and duties as a director are the same and the consequences of non-compliance can result in the liquidation of your company and/or personal liability (and potentially bankruptcy) for its directors.

An unfortunate aspect of the building industry is that one does not ordinarily get paid prior to the provision of labour or the supply of materials. Thus, the issue of payments is very significant to ensure continued cash flow and the solvency of the company to meet its debts as and when they fall due.

Take the simple example where a Statutory Demand is sent to a company because it has failed to pay within the normal payment terms. If the ASIC records are not kept up to date as to the location of the registered office of the company, and the Statutory Demand is sent to vacant premises, that may constitute a default, and it will follow with Supreme Court proceedings to wind up the company and indeed a winding up order against the company.

There have been instances where companies have been confronted with a liquidator knocking on the door of the company’s business premises and asking for the keys to the business and directing that it cease all trading whilst showing a copy of the Supreme Court winding up order to validate the liquidator’s authority.

The effect of a winding up order is monumental. All the director’s powers and authority to control the company are immediately extinguished and the liquidator forthwith assumes full control over the company.

In such a case, application will need to be made to the Supreme Court to terminate (set aside) the winding up. The company must be able to prove solvency and its cognisance of corporate morality and all costs of the liquidator (who must undertake an investigation and report to the court) and lawyers must be paid or secured if and before the winding up order is terminated. The costs can quite easily escalate to be in the tens of thousands of dollars.

In some instances due to a lack of ‘commercial morality’ or the responsible discharge of the directors duties and the conduct of the company’s affairs has resulted in the court refusing to terminate the winding up of companies where that winding up has come about in an accidental way (for example: failing to file documents, to keep records up to date or to pay tax liabilities).

All this cost, expense, inconvenience and stress may well have be avoided, had directors taken care to manage their corporate responsibilities, as trivial and frustrating as some of these responsibilities and duties may be.

One final thing of note, when a serious problem does arise for the first time, act swiftly and responsibly. It is imperative to get proper legal advice and to take the right steps at the earliest opportunity. Delay only tends to compound the problem and makes a satisfactory resolution all that more difficult to achieve.