The modern business environment requires a high level of skill and ethics to be practised by directors and officers of any size company. Tough economic conditions impose stringent obligations on directors and officers.
Directors and officers who ignore these obligations quite often find themselves facing significant fines, liability, and/ or prohibition from holding the role of director.
As well as these general duties, directors have a positive duty to prevent a company from incurring a debt if the company is insolvent or will become insolvent by incurring that debt. A company is insolvent if it is unable to pay all its debts when they are due and payable. This means that before the company incurs a new debt, the director must consider whether he/she has reasonable grounds to suspect that the company is insolvent or will become insolvent as a result of incurring the debt.
A company must keep adequate financial records to correctly record and explain transactions and the company’s financial position and performance. A failure of a director to take all reasonable steps to ensure a company complies with these requirements contravenes the Corporations Act.
A director is obliged to be constantly aware of the company’s financial position.
An understanding of the financial position of the company only at the time that a director signs off on the company’s financial statements is insufficient.
Breaches of the Corporation Act by directors of companies may result in personal
liability. Serious breaches may also result in criminal liability.
If some or all of the following events are present in a company and the company is subsequently placed into liquidation, then the director may be at risk of
prosecution by a liquidator.
If the company fails to meet a PAYG withholding, GST or SGC liability by the due date,the director automatically becomes personally liable for a penalty equal to the unpaid amount. When a PAYG withholding, GST or SGC liability remains outstanding, the ATO may issue a Director Penalty Notice, which is necessary to start legal proceedings to recover thepenalty.Even without issuing a notice, the ATO can collect the penalty by other means, such as withholding a tax refund.