Tobe Easton of Easton Lawyers
The days when company directors could plead ignorance of their company’s affairs are long gone, with the courts showing very little sympathy for directors who use ignorance as a defence. No longer can a director argue that the appointment was a token appointment, or one that he or she was pressured into accepting.
Directors are expected to:
• Be proactive and actively participate in the management of the company. Total non-participation is impermissible;
• Understand the role that a director performs;
• Ensure that the solvency of the company can be monitored on a continuing basis.
Directors in particular have an obligation to prevent their company from incurring debts that the company cannot pay for. A Director is also expected to be able to judge the fine line between solvency and insolvency, and be ready to act to prevent the company engaging in insolvent trading. However to be able to identify the fine line between solvent and insolvent trading is not an easy one.
It is the company’s cash-flow which is of crucial importance and this is where the line between solvent and insolvent trading can be found. A company is only solvent if it is able to pay all of its debts “as and when they fall due” – not just some of its debts. A company that has a surplus of assets over liabilities can still be technically insolvent because of the lack of cash flow to cover its debts.
If it is alleged that a cirector has contravened the Corporations Act in relation to insolvent trading the director must be able to prove one of the following as defence:
• when the company incurred the debt the director had reasonable grounds to expect that the company was solvent and would remain solvent even if the debt was incurred; or
• when the company incurred the debt the director had reasonable grounds to believe (and actually believed) that a subordinate in the company was competent enough to provide the correct information about the company’s solvency status and that the director relied upon this information; or
• that when the debt was incurred the director, because of illness or some other good reason, was unable to take part in the management of the company at that time; or
• that the director took all reasonable steps to stop the company from incurring the debt.
It is clear that although directors may delegate certain responsibilities to other subordinates in the company, they are still obliged to have an active role in the management of the affairs of the company.
To fail in this obligation to properly discharge the duties of the office of a director could lead to personal exposure to liability, and in many cases significant sums of money.
Easton Lawyers 62 Maple St Maleny Ph: 5494 3511 OR 6b/3 Obi Obi Rd Mapleton Ph: 5478 6500 email:tove@eastonlawyers.com.au
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