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
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:
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.
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:
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.
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