Are you a company director? Better brush up on your responsibilities!
Company directors need to keep in mind that the Corporations Act holds directors personally liable for many of the legal and financial obligations expected from a company.
As anyone running a business knows, commercial decisions must be made, and many times these decisions involve some degree of risk. While the distinction between entrepreneurial freedom and delinquent corporate behaviour will be clear cut for most company directors, there are nevertheless circumstances where these lines can blur, resulting in sometimes substantial (and sometimes unexpected) personal exposure.
Risks and liabilities
The corporate regulator, the Australian Securities and Investments Commission (ASIC), says failing to perform your duties as a director can, in the more extreme cases, lead to being found guilty of a criminal offence with a penalty of up to $200,000, or imprisonment for up to five years, or both.
ASIC gives an example of how a director may be asked by a bank to give a mortgage over their house to secure the company’s repayment of a loan. If the company does not repay the loan as agreed with the bank, the director will be liable (and could lose their house).
Another example is that a director’s obligations continue even after a company has ceased trading. Under certain circumstances a director can still be held personally liable for ongoing debts and other losses even after a business has stopped operating.
There are also the tax obligations for PAYG withholding and superannuation guarantee charge payments, which are outlined under the Tax Office’s “director penalty regime”.
The Tax Office, aware that some business readers may be shifting uncomfortably in their seats right about now, recommends that directors get up to speed on what is expected of them. It says one good source is the ASIC Guide for Small Business Directors.
A fact that ASIC has found small business company directors continually need to be reminded of is that as far as the law is concerned, a company has a distinct legal existence that is separate from that of its owner, manager, operator, employees and agents.
ASIC says a company has its own property, and its own rights and obligations. A company’s money and assets belong only to that company and must be used for the company’s purposes. But it also has the powers of an individual, including the power to:
- own and dispose of property and other assets,
- enter into contracts,
- sue and be sued.
Company directors, according to ASIC, have seven key responsibilities. These include:
- Disclosing personal details of directors – a company must inform ASIC of the name, date of birth and current residential address of directors
- Having a current registered office – a company must have a current registered office in Australia and must inform ASIC of its location
- Having a principal place of business – a company that operates a business from a location different from the registered office must inform ASIC
- Keeping financial records – a company must keep up-to-date financial records that correctly record and explain transactions and financial position (larger companies have additional obligations to lodge financial reports with ASIC).
(See our previous post and test your financial reporting knowledge with 10 quick multiple choice questions that seek to provide self-awareness of general competence, education, and links to additional resources/training regarding the technical elements of financial reporting.)
- Notifying ASIC of key changes – whenever there are certain key changes to the company’s details (for example registered office, principal place of business, directors), ASIC must be notified
- Paying relevant fees to ASIC – for example, the annual review fee
- Checking annual statements – a company’s details on the ASIC register must be accurate and up-to-date.