RMB Articles

Directors Must Never Drop Guard

Posted 10-11-2014
Written by admin 101

There have been some spectacular corporate insolvencies in Australia over the years. The collapse of large companies like HIH Insurance, Ansett Airlines and One-Tel, not to mention Lehman Brothers in the United States, all put big business in the headlines for all the wrong reasons.

The construction industry is particularly notorious for corporate collapses. Think Kell & Rigby, the hundred-year-old construction company that collapsed recently with 1400 unsecured creditors who were owed more than $16 million.

But high profile firms like that are just the tip of the iceberg. The business website Smartcompany last year reported that in one month 80 building and construction firms entered administration, liquidation or were hit by a winding up notice on the east coast of Australia alone.

The companies that collapsed were involved in earthmoving, project development, kitchens, fencing, civil engineering, plumbing, electrical work and plastering – and the flow-on effect would have been considerable for all the contractors, sub-contractors and suppliers who did not receive the money they were owed.

No doubt many Southern Highlands contractors and “subbies” have been hurt in this way over the years.

As you would expect, company directors are right in the firing line when companies go under, as they have a clear duty under the Corporations Act to prevent a company debt being incurred at a time when they may have grounds for even suspecting that the company is or may be insolvent.

In other words, they have a duty to ensure that a company does not continue trading when it is unable to pay its debts.

Failure to prevent a debt from being incurred may result in the director becoming personally liable, exposing the director’s personal assets to loss as well as the assets of the company itself.

Section 588G of the Corporations Act says that a director can be made personally liable for a debt where –

  • the director held office at the time when the company incurs a debt; and
  • the company was insolvent at the time, or became insolvent as a result of incurring the debt; and
  • at that time there were reasonable grounds for suspecting that the company was insolvent.

The law requires a director to act honestly, in good faith and to the best of his or her ability in the interests of the company. The company must always come first. Directors are in a position of trust and must behave in a trustworthy manner at all times.

So it is absolutely imperative that company directors understand their responsibilities and are well aware of their duties, particularly when trading and cash flow forecasts are not being met and finance facilities are near or at their limit.

Most importantly, they must make sure they understand the business so they can watch for warning signs – and never drop their guard.