A primary producer may be a director of either their own company, or of a cooperative, or of another company. The general duties of directors are set out in the Corporations Act. Directors are required to:
•disclose any conflict between their personal interests and those of the company (s. 191); •act in good faith in the interests of the company, and for a proper purpose (s. 181); •exercise the degree of care and diligence that a reasonable person in a similar position would exercise (s. 180); and •not make improper use of information or improper use of position (ss. 182–3). These duties are deliberately worded loosely to accommodate changing meanings, standards and circumstances.
Recent cases are important in showing that the duties and obligations of directors are treated seriously under the law. Directors who breach their duties under the Corporations Act can face severe penalties of up to $200 000 or disqualification from managing a company or both.
Ignoring directors' responsibilities
A Melbourne family owned a string of tobacconists that were very profitable. When the husband, who was the working director, died, his widow — also a director — asked her son to carry on running the business. In the son’s hands the business went rapidly downhill and ended up in liquidation. The widow was sued personally by the principal creditor because she had allowed the company to trade while insolvent and had thus breached her duty to act with care and diligence. Even though — indeed because — she had had no hand in running the company and had taken no interest in its fortunes, she was found personally liable for the debt to that creditor — about $250 000 — a decision which was confirmed on appeal to the Victoria Supreme Court. (Morley v. Statewide Tobacco Services Ltd (1992) 8 ACSR (305) Insolvent trading today — the duty imposed on directors.
See also ASIC v, Vizard [2005] FCA 1037
Trading while insolventSection 588G imposes one of the most stringent duties on directors. It requires you as a director to 'prevent' the company trading while it is insolvent or becoming insolvent.
The duty requires director/s to avoid incurring further debts when the company is insolvent including: Paying a dividend, reducing the share capital, buy back shares, redeeming prefences shares, financially assisting other persons to acquire shares or entering into an uncommercial transaction.
To start with, this implies that you must be sufficiently informed about the company's financial state to know when it is approaching insolvency.
'Prevent', in this context, means you must do everything reasonable to stop the company incurring the debt. This means, for example, arguing against it at a board meeting, having your dissent recorded and even resigning from the board if you feel this is necessary.
If the company insists on incurring the debt, and is subsequently placed in liquidation, two things may happen. First, the directors who were responsible could be prosecuted by the ASIC and incur a civil penalty of up to $200 000. Secondly, each of the directors - except those who could show that they had acted responsibly (s. 588H) - could be sued personally for that debt. In 2003, the ASIC introduced a National Insolvent Trading Program to, among other things, ensure directors are aware of their company's financial position, and make directors of potentially insolvent companies aware of their responsibilities and the implications of continued trading if they know they're insolvent
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