By O’Brien Palmer

What is insolvent trading

Directors have many duties, one of which is to prevent their company from trading whilst insolvent. Pursuant to s 588G of the Corporations Act 2001 (the Act), a director breaches that duty if they cause the company to incur a debt in circumstances where they knew, or ought to have known, that the company is insolvent, or likely to become insolvent as a result of that transaction. If proven, directors can be charged, fined and/or become personally liable for the debts incurred by the company whilst it was insolvent.

What is solvency

Definitions

Section 95A of the Act states:

1. A person is solvent if, and only if, the person is able to pay all the person’s debts, as and when they become due and payable.
2. A person who is not solvent is insolvent.

Unfortunately, the usefulness of these definitions is limited except to the extent that the wording of the legislation recognises cash availability as the primary determination of solvency. For further guidance it is necessary to refer to case law.

Assessing a company’s solvency

The importance of cash flow in determining solvency was articulated by his Honour Dodds-Streeton J in his judgment in the matter of Crema Pty Ltd v Land Mark Property Developments Pty Ltd [2006] VSC 338, where he stated that:

Section 95A of the Act enshrines the cash flow test of insolvency which, in contrast to a balance sheet test, focuses on liquidity and the viability of the business. While an excess of assets over liabilities will satisfy a balance sheet test, if the assets are not readily realisable so as to permit the payment of all debts as they fall due, the company will not be solvent. Conversely, it may be able to pay its debts as they fall due, despite a deficiency of assets.

The assessment of the solvency of a company requires an analysis of the totality of the company’s circumstances, including industry norms and available credit. This firm was involved in an often reported case known as Southern Cross Interiors Pty Ltd (In Liquidation) & Anor v The Deputy Commissioner of Taxation [2001] NSWSC 621. In his judgment, His Honour Palmer J. stated that the following propositions could be drawn from the established authorities:

1. A company’s solvency is a question of fact to be ascertained from considering its financial position as a whole.
2. In considering a company’s financial position as a whole, the Court must have regard to relevant commercial realities, such as what resources are available to a company to meet its liabilities as they fall due.
3. In assessing whether a company’s position as a whole reveals surmountable temporary illiquidity or insurmountable endemic illiquidity, it is proper to have regard to the commercial reality that creditors will not always insist on payment strictly in accordance with their terms of trade but that does not constitute a cash or credit resource available to the company.
4. The commercial reality that creditors will normally allow some latitude for payment of their debts does not warrant a conclusion that the debts are not payable at the contracted time.
5. In assessing solvency, the Court acts upon the basis that a contract debt is payable at the time stipulated for payment in the contract.

These propositions, whilst informative, are somewhat broad. A further and useful commentary on solvency was given by his Honour Mandie J in a judgment delivered in the high profile case of ASIC v Plymin & Anor [2003] VSC 123 (otherwise known as the Waterwheel Case). Justice Mandie adopted 14 indicia of insolvency which are now often utilised in assessing the solvency of a company. However, this list is not exhaustive. The Australian Securities & Investments Commission (ASIC) has published a guide on the warning signs of insolvency. You are also referred to a newsletter previously issued by O’Brien Palmer entitled Practical warning signs of insolvency for small business.

Temporary or endemic cash flow insolvency

A company is insolvent where the available resources are insufficient to meet the debts that are due and payable at that specific point in time. These resources do not necessarily have to be assets of the company, which is why the balance sheet can be irrelevant to the assessment of solvency. The ability of a company to draw on available credit resources is also relevant to any determination of solvency.

It is relevant to distinguish between a company that is insolvent and a company that is experiencing temporary cash flow issues. In the judgment of his Honour Jacobs J in the matter of Hymix Concrete Pty Ltd v Garrity (1977) 13 ALR 321, it was acknowledged that:

…a temporary lack of liquidity is to be distinguished from an endemic shortage of working capital where liquidity can only be restored by a successful outcome of business ventures in which the existing working capital has been deployed.

An endemic shortage of working capital will be apparent where the company is utilising credit funds on terms that it cannot comply with or at debt levels beyond that which it can service. It would also be evident in circumstances where a company is otherwise displaying numerous signs of insolvency.

How a liquidator proves insolvency

Steps to prove the date of insolvency

In order to determine the date on which a company is deemed to have become insolvent, an insolvency practitioner will review the available books and records of a company, as well as records obtained from third party sources such as creditors, banks and statutory authorities. In conducting this review, the practitioner is looking for evidence of indicia of insolvency. The key indicia of insolvency include the following:

1. overdue trade creditors;
2. overdue taxation liabilities;
3. recovery action being initiated by creditors;
4. no access to alternate finance;
5. Payment of debts by way of instalments.

As a result of this review, it can become apparent that at a certain point in time, sufficient indicia of insolvency are present to justify a conclusion that the company was insolvent at that time.

Section 588E(3) of the Act provides that where the evidence supports a determination that a company became insolvent at a time within 12 months prior the company being wound up, it is presumed that the company was insolvent throughout the period between that time and the date that the company is wound up.

If the company has not maintained adequate books and records in compliance with s 286 of the Act, then a presumption of insolvency arises for the period in which the books and records have not been properly maintained. Section 588E(4) of the Act states that if a company does not keep comprehensive and correct records of its accounts and financial position, or if it does not keep records of a transaction for seven years after its completion, then that company will be presumed to be insolvent during the period to which the records relate.

Not only is the inability to maintain financial records an indicator of insolvency, but failure to maintain proper books and records may render a company legally insolvent from a date which is earlier than it actually became insolvent.

Debts incurred

After a date of insolvency is established, the liquidator will then assess the debts incurred after that date, in order to determine the quantum of the personal liability of a director for trading whilst insolvent.

Claim for trading whilst insolvent

Where it is determined that a company has traded whilst insolvent, then an insolvency practitioner will in the ordinary course report this alleged contravention to ASIC in accordance with either ss 422, 438D or 533 of the Act.

A liquidator appointed may also take steps to seek compensation from the director(s) for the quantum of the debts incurred by the company after it became insolvent. These steps usually involve the issuance of a letter of demand to the director(s) for repayment of a fixed sum of money. The liquidator may also instruct a solicitor to further pursue the claim where the initial demand is ignored or commercial settlement cannot be reached. The liquidator may be required to commence proceedings against the director(s) to seek compensation orders.

In circumstances where there are multiple directors, the liquidator is entitled to recover from whichever of the directors is most commercial to pursue. That director has a right of indemnity against their fellow directors to recover an equitable share of the amount recovered by the liquidator.

Defences available to directors

Directors may have defences to a claim made for insolvent trading. Section 588H of the Act states that a director can claim a defence where he or she:

1. had reasonable grounds to believe that the company was solvent at the time it incurred the debt, and that it would remain solvent even after incurring the debt;
2. can prove that the person in charge of providing accurate information concerning the company’s financial status and solvency was performing this task, and led the director to believe that the company was solvent and would remain to be so even after incurring the debt;
3. had good reasons not to be involved in the management of the company when it incurred the new debt, such as a result of a serious illness;
4. can prove that they took all reasonable steps to prevent the company from incurring the debt.

Consequences of insolvent trading

A director who has been charged with insolvent trading faces several consequences.

Civil penalties

Company directors may face fines of up to $200,000 in circumstances where their breach was not dishonest.

Criminal penalties

If trading whilst insolvent is proven to be of a dishonest nature, then directors can face criminal convictions for this breach. A criminal charge carries a maximum penalty of $220,000 and five years imprisonment. A person may also be disqualified from managing corporations.

Compensation orders

If a liquidator suspects a person may have breached their duty in preventing the company from trading whilst insolvent, then he or she, a creditor, or ASIC can take action against the director pursuant to s 588M of the Act. A Court may order that the director repay the company to the value of the debts incurred from trading whilst insolvent.

It should be noted that a creditor can only take this action with the permission of the liquidator or leave of the court, and may only pursue the director for the value of its debt.

Holding company liability

Section 588V of the Act provides that a holding company may be liable for the insolvent trading of its subsidiary in circumstances where the directors of the holding company were aware, or should have been aware, of the insolvency of the subsidiary company.

The impact of repayment arrangements on solvency

Smith v Boné, in the matter of ACN 002 864 002 Pty Ltd (in liq) [2015] FCA 319

Background

Mr Barry Boné was the sole company director of Petrolink Pty Ltd (Petrolink). In December 2011, Mr Smith was appointed as liquidator of the company.

The liquidator brought an action against the director seeking compensation for insolvent trading pursuant to s 588G of the Act for the losses suffered by Petrolink’s creditors.

In this dispute, the liquidator claimed that Petrolink was insolvent from 30 June 2009 until the date on which the winding up commenced and that Petrolink continued to trade and incur debt throughout this period. However, the director argued that his company was only insolvent from July 2011.

Relevant to the outcome of the case was the fact that Petrolink had entered into a payment arrangement with the Australian Tax Office (ATO), its main creditor, in order to discharge its outstanding debts.

The director’s defence

The director argued that any reasonable person would have believed that the company was solvent based on the payment arrangement he had established with ATO, which he argued deferred the debts of the company such that they were no longer due and payable. He also stated the company was generating significant revenue throughout the period.

The ruling

His Honour, Gleeson J, found that any reasonable person in the position of the director would have grounds to believe that the company was insolvent and that despite the revenue being generated by the company, its debts remained unpaid. In regard to the payment arrangement, the Court found that the payment arrangements negotiated with the ATO did not have a material effect on the solvency of Petrolink because of the shortness of their duration and the fact that none of them had the effect that Petrolink was not required to pay its outstanding tax liability imminently. The payment arrangements in fact demonstrated that Petrolink was continuing to experience common features of insolvency.

Ultimately, His Honour determined that Petrolink was insolvent from 12 May 2010 and the director was found to be liable to the liquidator for an amount of $669,582.86.

In addition, while the Court did not find that the director had acted or conducted himself dishonestly, it did not exempt him from being held personally liable for insolvent trading. The Court ruled that the director did not seek professional advice about the company’s financial position despite being advised in June 2010 that if Petrolink continued to trade, it may be trading whilst insolvent.

The principle

Directors should be aware that entering into payment arrangements does not provide relief from the debt being due and payable, and may simply be an assistance measure for companies requiring short-term relief. Director’s should be aware that in entering into repayment arrangements with the ATO, they may be providing evidence to a subsequently appointed liquidator that the company was insolvent and that the director was aware of the insolvency. As such, caution should be exercised by directors when entering into repayment arrangements that they only take on repayment commitments that the company can comply with else they risk incurring a personal liability for insolvent trading.

Conclusion

Directors need to be aware of the serious consequences of trading whilst insolvent, and the importance of seeking early professional advice about their company’s status and financial position. Taking the appropriate steps and action is not only a defence to any proceedings, but may be essential to the survival of the company. Where directors are not adequately informed or fail to deal with the potential insolvency of their companies in accordance with their duties as a company director, then they have a greater risk of becoming personally liable for the debts of their companies.

Tip Box

Whilst written for Victoria this article has interest and relevance for practitioners in all states.

By O’Brien Palmer

INSOLVENCY AND BUSINESS ADVISORY

First published on the website, www.obp.com.au

Introduction

Winding up a company that acts as the trustee of a trust is a common occurrence. Many of the underlying principles in liquidating a corporate trustee have long been established. However, the circumstances in which a liquidator has the power to deal with trust property still lack clarity. This has been highlighted in the conflicting decisions of the court that were handed down late last year; the first in the Federal Court of Australia in Kitay, in the matter of South West Kitchens (WA) Pty Ltd [2014] FCA 670, the second in the Supreme Court of New South Wales in the matter of Stansfield DIY Wealth Pty Limited (in liquidation) [2014] NSWSC 1484 (30 October 2014).

South West

The facts

The liquidator of South West sought directions from the court that he had the power to sell trust property pursuant to s 477(2)(c) of the Corporations Act 2001. The application was made in circumstances where there were potentially conflicting authorities as to the power of a liquidator in dealing with trust property. At the time of the Liquidator’s appointment:

1. South West was trustee of the South West Kitchen Unit (Hybrid) Trust (the trust).
2. All of the assets of South West were owned in its capacity as trustee of the trust.
3. The trust deed for the trust provided that upon liquidation, South West was disqualified from acting as trustee.

The law

The ‘foundational concepts’ based on existing authorities were set out in the judgment of McKerracher J, delivered on 24 June 2014. These concepts are summarised as follows:

1. A trustee has a right of indemnity out of the trust assets for expenses and liabilities incurred on behalf of the trust and a right of exoneration from liability.
2. A trustee is entitled to the benefit of an equitable lien over the trust assets as a means of securing its rights of indemnity and/or exoneration.
3. When a liquidator is appointed to a trustee company, the liquidator acquires the same rights of indemnity and exoneration.
4. The equitable lien securing the trustee’s right of indemnity and exoneration does not give the (removed) trustee power of sale. Rather, it is a security which is enforceable by the trustee only by way of judicial sale or by the appointment of a receiver with a power of sale.

According to his Honour, the issue arising beyond these concepts and on which there may be some doubt in the authorities, is whether the liquidator of a trustee company that is unable to continue acting as trustee:

1. can exercise the power of sale granted to liquidators pursuant to s 477(2)(c) of the Act;
2. is required in each instance to obtain a court order to sell trust assets.

His Honour expressed the view that the operation of s 477(2)(c) in these circumstances had not been expressly considered in previous judgments, except in the decision of Finkelstein J in Apostolou v VA Corporation AUST Pty Ltd [2010] FCA 64A (Apostolou). In that case, his Honour found that the liquidator had a dual power to realise trust assets in the course of winding up a company which acted as trustee, where the company has both legal title and an equitable interest in the trust assets; that power being conferred pursuant to the trust deed and also pursuant to s 477(2)(c) of the Act.

The decision

In delivering his judgment, his Honour followed the decision in Apostolou, finding that:

1. South West had both legal ownership of the assets of the trust as a bare trustee and beneficial interest in the assets as a holder of an equitable lien.
2. There is no reason in policy or principle and none referred to in the authorities discussed, as to the why a liquidator’s powers of sale should be limited by the terms of a private trust agreement.
3. There appears to be no constraint on the power of sale under s 477(2)(c) of the Act, nor does it impose any limitation on the power of sale insofar as the assets of a company held on trust.
4. In the absence of any statutory constraint or other complication, there appears to be no other reason why a liquidator ought not be permitted in a straightforward case to discharge their duties to conduct the liquidation in the ordinary manner.
5. Proceeding this way makes good practical sense avoiding the need for liquidators of trustee companies to approach the court on every occasion to seek approval to sell trust assets.

Accordingly, his Honour declared that the liquidator had power pursuant to s 477(2)(c) of the Act to sell, dispose or otherwise deal with the assets of the trust.

Stansfield

The facts

The liquidator of Stansfield sought directions from the court to the effect that the company in liquidation be permitted to sell or otherwise deal with the property of a superannuation fund. This application was no doubt filed in light of the potentially conflicting authorities but with the added complication that the property in question was held on account of a superannuation fund. At the time of the liquidator’s appointment;

1. Stansfield was acting as trustee of the Elliot Stansfield Super Fund, a regulated selfmanaged superannuation fund (the fund).
2. The assets of the fund totalled $108,916.
3. The liabilities of the fund totalled $98,941.
4. The only function of Stansfield was to act as trustee of the fund.

The law

In his judgment delivered on 30 October 2014, Brereton J said that there were two relevant potential scenarios; the first that the company in liquidation remained as trustee of the fund and the second, the company in liquidation does not remain as trustee of the fund.

The company in liquidation remaining as trustee of the fund

In relation to the first scenario, his Honour concluded that so long as the company in liquidation remained as trustee of the fund, then the liquidator was entitled (subject to the impact of superannuation laws) to administer the assets of the fund, pay the creditors of the fund, wind up the fund and recover all of his remuneration and expenses from the assets of the fund.

The company in liquidation not remaining as trustee of the fund

In relation to the second scenario, his Honour essentially agreed with the foundational concepts set out in South West which are summarised above. His Honour then when on to consider the possible application of s 477(2)(c) of the Act in light of the relevant case law and particular, the judgments delivered in Apostolou and South West.

The conclusion reached by his Honour was that he respectfully disagreed with the decision in Apostolou, finding instead that s 477(2)(c) does not empower a liquidator to sell the beneficial interest in property that a company holds on trust even if the company holds an equitable charge over that property because the property is not itself ‘property of the company’. To put that another way, a liquidator’s power to deal with property does not extend to property that is not beneficially the property of the company.

The impact of superannuation law

His Honour was obliged to also consider the operation of the Superannuation Industry (Supervision) Act 1993 (SISA) concluding that a company in liquidation becomes a ‘disqualified person’ for the purposes of that legislation but notwithstanding, remains as trustee of the fund. However, by continuing to be and act as trustee, a company contravenes s 126K of SISA and thereby commits an offence. If, as would be prudent, a company resigned as trustee once a liquidator has been appointed to it, then the liquidator would have no power of sale.

The decision

In light of the foregoing, his Honour declined to make the direction sought by the liquidator. Rather, his Honour proposed to make declarations and orders pursuant to s 479(3) of the Corporations Act 2001 to the following effect:

1. The liquidator would be justified in causing the company to resign as trustee of the fund.
2. The liquidator would be justified in applying to the court to be appointed as receiver without security of the assets of the fund with the powers that a liquidator has in respect of the property of a company under s 477(2)(c) of the Act.

Conclusion

It is obvious from these judgments that the law is not settled in relation to dealing with trust property in circumstances where the trustee company has been wound up and is no longer acting in that capacity. The decision in South West is commercially sensible and avoids the need for a liquidator of a trustee company to approach the court on every occasion trust property is to be sold. This of course conflicts with the judgment in Stansfield. This conflict needs to be resolved either by the legislature or the High Court of Australia. In the meantime, a liquidator appointed to a trustee company will be subject to the law of trusts in the particular state in which he or she practises and will need to seek legal advice as to the appropriate way to deal with trust assets. The partners of O’Brien Palmer are presently minded to follow the process in Stansfield until such time as they are advised otherwise.

By O’Brien Palmer

INSOLVENCY AND BUSINESS ADVISORY

First published on the website, www.obp.com.au

A GUIDE TO DIRECTOR’S DUTIES

Introduction

Many people who accept an appointment as a company director or secretary are completely unaware of the potential risks they face from personal liability, civil penalty or criminal conviction. These risks arise primarily from failing to comply with statutory duties contained within the Corporations Act 2001 (‘the Act’) that largely mirror those duties which have been enshrined in the Common Law. In addition to those duties, there are a plethora of obligations imposed upon directors by other state and federal legislation such as taxation laws, employment standards, work health and safety regulations, environmental protection measures, consumer protection strategies, Australian Stock Exchange listing rules for publicly listed companies and privacy protocols.

In short, a person acting as a director should take his or her duties seriously. This is especially true in times of financial difficulty. This newsletter will concentrate on the duties of directors, other officers and in some cases employees as set out in the Act and the potential liability for breaching those duties.

Who has a duty to comply?

It is important to consider the persons who are obligated to comply with their statutory duties. Section 9 of the Act defines ‘officer’ to include a director, secretary or any person who acts in the position of a director, regardless of the name that is given to their position. A person who acts in the position of a director is often referred to as a ‘shadow-director’. It is worth noting that external administrators are similarly subject to the same duties as officers.

Directors duties

General Duties – Civil Obligations

Set out in the table below are the duties of company officers which if contravened, give rise to civil obligations.

Duty	Relevant Information
Care & Diligence Section 180(1)	An officer of a company must exercise their powers and discharge their duties with the degree of care and diligence that a reasonable person would in the same circumstances.
Defence Section 180(2)	Business Judgement Rule – A person who makes a “business judgment” does not breach their duty, if they: make the judgment in good faith for a proper purpose; and do not have a material personal interest in the subject matter of the judgment; and make an informed decision; and rationally believe that the judgment is in the best interests of the corporation.
Good Faith Section 181	An officer of a company must exercise their powers and discharge their duties in good faith in the best interests of the company and for a proper purpose.
Use of Position Section 182	A person who is an officer or employee of a company must not improperly use their position to: gain an advantage for themselves or someone else; or cause detriment to the company.
Use of Information Section 183	A person who obtains information because they are, or have been, an officer of a company or an employee must not improperly use that information to; gain an advantage for themselves or someone else; or cause detriment to the company.

If a person does not meet these requirements, and the Court is satisfied that the person has contravened one of the sections, then the Court can make a declaration of contravention pursuant to section 1317E of the Act, and:

1. impose a fine of up to $200,000 (section 1317G of the Act); and
2. disqualify a director from managing companies (section 206C of the Act).

The Courts are also able to impose other remedies for breach of duty. Section 598(2) of the Act provides that where the Court is satisfied that a person is guilty of fraud, negligence, default, breach of trust, or breach of duty and the company has suffered or is likely to suffer loss or damage as a result, then the Court may, on the application of either the Australian Securities and Investments Commission (‘ASIC’), an Administrator, a Liquidator or a person nominated by ASIC, make an order pursuant to section 598(4) of the Act directing that person:

1. to pay money or transfer property to the company; and
2. to pay to the company the amount of the loss or damage.

General Duties – Criminal Offences

Section 184 of the Act effectively states that an offence is committed if a person recklessly or dishonestly breaches sections 181, 182 or 183 of the Act. Persons who commit these offences may be criminally liable and be fined amounts up to $220,000 and/or be imprisoned for up to five years.

Insolvent Trading

Section 588G(1) of the Act imposes a duty on directors to prevent their companies from trading whilst insolvent. This section applies if a person was a director of a company at the time when the company incurs the debt and is insolvent at that time or becomes insolvent as result of that transaction and the director had reasonable grounds to suspect the company was insolvent or would become insolvent as a result of entering that transaction.

Breaching this duty can result is in ASIC seeking from the Court a declaration of contravention against a director and the imposition of a civil penalty pursuant to sections 1317E and 1317G of the Act. In addition and on an application for a civil penalty order, the Court has the power pursuant to section 588J of the Act to make orders:

1. disqualifying a person from managing companies (section 206C of the Act); and
2. requiring a person to pay to the company compensation equal to the loss or damage suffered by the company.

A breach of this duty is a criminal offence pursuant to section 588G(3) of the Act if the failure to prevent the company from incurring the debt was dishonest. Furthermore and in the event of liquidation, if a director has breached this section, then pursuant to section 588M(2) of the Act, the company’s liquidator may recover from the director, as a debt due to the company, an amount equal to the loss or damage suffered by the company. Alternatively, a creditor of the company, may with the consent of the liquidator, begin proceedings pursuant to section 588M(3) of the Act to recover from a director as a debt due to the creditor, an amount equal to the loss and damage suffered by the creditor directors who are the subject of claims in relation to insolvent trading may be able to avail themselves of the defences which are set out in section 588H of the Act.

Maintenance of Proper Books & Records

Section 286(1) of the Act imposes an obligation on company directors to maintain adequate books and records that:

1. correctly record and explain its transactions and financial position and performance;
2. enable true and fair financial statements to be prepared and audited.

This obligation extends to transactions undertaken by a company as a trustee.

Section 286(2) requires that the books and records of the Company be maintained for a period of seven years. Pursuant to sections 344 and 1317E of the Act, the penalties for breaching these duties may include:

1. the imposition of a fine of up to $200,000 (section 1317G of the Act);
2. disqualification from managing companies (section 206C of the Act).

Section 588E(4) of the Act provides that where a company is being wound up, and in circumstances where that company has failed to maintain proper records or retain them for the requisite period, then the company will be presumed to be insolvent for the period for which the records are not available. This can give rise to serious consequences where it is being alleged that a director has allowed a company to trade whilst insolvent.

Click here to view ASIC website – What books and records should my company keep?

Trust liabilities

Corporate trustees are very common. Pursuant to section 197 of the Act, where a company is acting as or purporting to act as trustee and incurs a liability which it cannot meet, a director of that company can be held liable to discharge the whole or part of the liability if the company is not entitled to be fully indemnified against the liability out of trust assets because of one or more of the following:

1. the company has breached its trust;
2. the company was acting outside the scope of its powers as trustee;
3. a term of the trust denying, or limiting, the company’s rights to be indemnified against the liability

General Requirements

In addition to the foregoing, the Act requires directors to:

1. update the company database maintained by ASIC as required to ensure its accuracy in accordance with sections 142, 146, 168, 205B, and 205D of the Act.
2. comply with all reasonable requirements and provide proper assistance to validly appointed external administrators pursuant to sections 475 and 530A of the Act.
3. refrain from acting as a director of a company, whether formally appointed or not, if excluded from doing so pursuant to sections 206B and 206C of the Act. This most relevantly excludes bankrupts or anyone who has entered into a personal insolvency agreement under Part X of the Bankruptcy Act 1966.
4. disclose to other directors of their companies any potential material conflicts of interests that they might have in relation to the conduct of their duties as director in accordance with sections 191 – 195 of the Act.

External administrators’ obligation to report to ASIC

A liquidator, in carrying out an investigation into the affairs of a company and the conduct of its principles, has a statutory duty pursuant to section 533 of the Act to file a report with ASIC if the expected dividend is less than 50 cents in the dollar, setting out any identified potential offences or breaches of duty committed by officers, employees or shareholders of a Company. At its discretion, ASIC may require the liquidator to submit a supplementary report particularising the alleged offences or breaches of duty, and may also provide funding for that purpose. Similar provisions apply to a voluntary administrator or receiver if appointed.

Conclusion

If company officers and employees adopt ethical and prudent business practices, then they are unlikely to breach their statutory duties. ASIC has issued an explanatory memorandum as to the general duties of directors and other officers, those duties being summarised above. In the summary, ASIC advises that company officers can greatly reduce their exposure by having appropriate insurance, and if they carry out their duties by;

1. being honest and careful in their dealings.
2. remaining active and involved in the company’s operations.
3. making sure that their companies can pay their debts on time.
4. maintaining proper financial records.
5. acting in the best interests of their companies.

As always, directors should take appropriate professional advice from their accountants, solicitors and advisors if they are in any doubt as to their duties, or as to the consequences of potential breaches.

Click here to view ASIC website – Your company and the law