Do You Know Your Director Duties?

Failure to maintain financial records and fulfil Directors duties can lead to financial ruin.

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Directors Duties Must be Fulfilled

Directors have a number of legal duties that include remaining constantly aware of the financial position of the company and acting in a timely manner to address any solvency issues

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Directors’ Legal Requirements

Understanding Directors Duties and Responsibilities

Directors have a legal duty to remain constantly aware of the financial position of the company. The law not only requires a director to maintain proper books and records but to also:

  • regularly review the company’s financial situation
  • take active steps to question and confirm the financial position and solvency of the company
  • seek advice from qualified professionals if a problem is suspected
  • act in a timely manner to address any solvency issues.

The law does not consider it sufficient to understand the financial position only once a year when you sign the annual accounts.

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Presumption of Insolvency
If a director fails to maintain or retain financial records for the 7 years required by the Corporations Act, a company will be presumed to be insolvent throughout the period in which records were not kept.

This means that if a claim for Insolvent Trading is made, there will be no defence to that action and personal assets may be lost.

Insolvent Trading
Directors also have a duty to prevent a company from trading and incurring debt while it is insolvent. A company is insolvent if it is unable to pay its debts as and when they fall due for payment.

If a director incurs new debt at a time when a reasonable person in that position would understand the debt could not be repaid when it was due for payment, a claim for insolvent trading may be made and again, personal assets may be lost.

To avoid this, before any new debt or credit is sought, a director must be sure there are reasonable grounds to believe the company is solvent and able to pay its debts as and when they become due for payment. A director can only do this by reference to the financial records, assuming they have been maintained.

Directors other Duties Under the Corporations Act

All directors must:

  • Act with care and diligence
  • Act in good faith and for a proper purpose
  • Not use their position or information improperly or to gain advantage for themselves or to harm the company
  • Act dishonestly or recklessly

Failure by a director to take all reasonable steps to ensure a company fulfils these requirements contravenes the Corporations Act.

We can work with you to help you understand and comply with the regulations.

Directors Duties

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