Is your client a Director?

If you are an accountant or business advisor, you are likely to have a number of clients who are involved with a company as a Director. Therefore you should all be aware of the various Director duties imposed by the law on your clients in their role as a Company Director.

Generally speaking, a Director should adopt the following principles when making decisions regarding the company:

• To act in good faith in the best interests of the company
• To exercise powers for their proper purpose
• To avoid conflict of interests

More specifically, we emphasise the importance of section 588G of the Corporations Act, which governs a Director’s duty to prevent insolvent trading.

A Director is under a duty to prevent his or her company from trading whilst insolvent. According to the Corporations Act a Director breaches this duty if he or she fails to prevent the company incurring debts if there are reasonable grounds for suspecting that it is insolvent. Subject to certain defences, contravening Directors are liable to pay compensation to the company in the event it goes into liquidation, of an amount equal to the loss or damage suffered by unsecured creditors in relation to the debts incurred.

The decision of Einfeld J in Metropolitan Fire Systems Pty Ltd v Miller is interesting. The case confirms that Directors will not be able to defend themselves against personal liability for breaching the section by asserting that they did not know the company was insolvent and relied on others to monitor the company’s financial position.

Because of the potential serious consequences that may result from a breach of Director’s duties, accountants need to be mindful of this when advising clients in their financial affairs.

Macks Advisory is a firm that practices exclusively in the areas of insolvency and business reconstruction and if you have a query, you are invited to contact Peter Macks at Macks advisory on 08 8231 3323 or email to pmacks@macksadvisory.com.au.