Directors have a fundamental responsibility to act in the best interests of their company, and the Corporations Act outlines a range of duties and obligations to ensure this occurs. Understanding and fulfilling these obligations is crucial, particularly when a company faces financial distress.
Sections 180 to 184 of the Corporations Act detail the key legal obligations, requiring directors to act honestly, in good faith and in the company’s best interests and to avoid prioritising personal interests.
Directors are also expected to exercise their powers and perform their duties with reasonable care and diligence. This includes ensuring that the company complies with record-keeping and financial reporting
requirements as per the Corporations Act.
A critical duty for directors is to monitor the company’s financial position and to ensure that it does not trade while insolvent or when insolvency is suspected. Proactive steps to address financial difficulties can help avoid more serious consequences.
Even when a company enters external administration, such as liquidation or voluntary administration, a director’s duties continue. In these situations, directors have an important role in assisting the external administrator.
Specifically, directors must assist the external administrator by:
- Providing access to the company’s assets
- Handing over the company’s books and records
- Providing a report on the company’s activities and property
- Meeting with the external administrator to provide information and assistance.Fulfilling these obligations is essential to minimise the impact on creditors and facilitate a smooth administration process.
Failure to meet these obligations can lead to serious consequences, including legal action by the Australian Securities & Investments Commission (ASIC), which is responsible for enforcing corporate law.
To avoid such issues, directors should be aware that ASIC actively pursues misconduct, and that non-compliance can result in court proceedings and potential fines.
ASIC Deputy Chair Sarah Court emphasised the importance of directors assisting liquidators, noting in a past media release that ASIC prosecutes those who fail to provide necessary assistance. According to ASIC’s 2022/23 Annual Report, a significant number of convictions have involved directors failing to assist liquidators, resulting in substantial fines.
Practical advice for Directors:
- Stay informed: Ensure you have a clear understanding of your duties and obligations under the Corporations Act.
- Maintain accurate records: Keep comprehensive and up-to-date financial records.
- Monitor business performance: Ensure there are systems and processes in place to obtain regular monthly reporting on the company’s financial position and, if you need assistance in interrupting the financial information, seek assistance from a qualified accountant.
- Seek professional advice: If you suspect financial difficulties, seek advice from qualified professionals like the William Buck Restructuring & Insolvency team as early as possible.
- Cooperate fully: If the company enters external administration, cooperate fully with the external administrator.
- Separate personal from corporate: Clearly keep personal affairs and records distinct from the company’s.
By taking these steps, directors can fulfill their obligations, minimise potential negative consequences, and contribute to a more efficient and equitable outcome for all stakeholders.
Contact your local William Buck Restructuring and Insolvency advisor if you need any further assistance with this transition.
