Spotlight On Directors – Responsibilities And The New Penalty Regime
This month we look at the role and responsibilities of the company director and the increasing potential for personal exposure to company obligations.
The much publicised decision in the Centro case provides some clarity on the legal duties of directors and the extent they can rely on advice from management and external advisers. Plus earlier this month the Federal Government released draft legislation providing detail of the mechanism by which it proposes to give effect to its Budget announcements of imposing further personal liability on directors for certain company tax obligations.
The ‘Centro’ decision
Last month’s decision in the ‘Centro’ case (Australian Securities and Investments Commission v Healey [2011] FCA 717) highlights the extent of obligations and responsibilities of directors. Although the case was determined in relation to directors’ duties on financial reporting matters, the decision has application to directors’ responsibilities generally.
The case was a civil penalty action by ASIC against eight directors (2 executive directors and 6 non-executive directors) of companies in the Centro Properties ‘group’. The 2007 Annual reports and financial statements of certain entities in the ‘group’ incorrectly classified over $2 million of short term liabilities as non-current and failed to disclose guarantees of approximately USD$1.7 billion which were given after balance date. ASIC alleged that in failing to identify these errors, the directors had breached s.180 of the Corporations Act – the directors’ broad duty to act with care and diligence – and s.344 of the Corporations Act, which requires directors to take reasonable steps to comply with the financial reporting obligations.
Justice Middleton in the Federal Court of Australia found that each director had breached these duties.
The directors had defended ASIC’s allegations claiming that they had relied on the advice of external advisers (the auditors) and had also placed reliance on the internal processes (Board Committee reviews etc) of the Centro group to ensure that the accounts were accurate and complied with the relevant standards.
Justice Middleton noted that the directors were “intelligent, experienced and conscientious people” and emphasised that there was no suggestion that they had not acted honestly. The Court also accepted that neither the auditors nor the internal management had raised any ‘red flags’ to alert the directors to the accounting errors.
Nonetheless, the Court held that the mistakes in the accounts were so obvious that competent directors could not simply ‘rubber stamp’ the information provided, by relying entirely on the processes put in place. The directors had been provided with sufficient information and material to critically examine the financial statements - and it was their core responsibility to apply an independent mind in order to express an opinion on whether the accounts gave a true and fair view of Centro’s financial position. This responsibility could not be delegated nor could the directors totally rely on the views of others, irrespective of their level of competence. In the circumstances of the case, the directors had not complied with their positive statutory obligations.
The decision confirms the proposition that directors are expected to be aware and knowledgeable of the activities and financial affairs of the company to which they are appointed. Whilst they are entitled to place reasonable reliance on the advice of management and the existence of internal processes, they must nonetheless on a personal level apply a critical analysis of the material placed before them in order to discharge their statutory obligations.
Update on changes to the Director Penalty regime
In previous issues, we reported on changes to the director penalty regime proposed in the 2011/12 Federal budget.
The Government has now released draft legislation for comment. If enacted in its current form, the legislative changes will result in director penalties (ie., amounts equivalent to unpaid tax) being imposed on directors for a company’s unremitted PAYG(Withholding) tax and also, as from the date of Royal Assent, for unremitted employee superannuation contributions.
The penalty will be imposed from the due date – for PAYG(W) this is the relevant BAS due date, for superannuation contributions, the due date is the lodgement date for a superannuation guarantee shortfall statement for a quarter.
If a company does not report the relevant obligation to the ATO within 3 months of the due date, the ATO can take legal action to recover the penalty – without first serving the director with a Director Penalty Notice (DPN).
Importantly, these new automated recovery procedures may apply to PAYG(W) liabilities due before the date of Royal Assent if these amounts remain outstanding after the date of Royal Assent.
In order for directors to avoid potential personal liability before Royal Ascent is granted they ought to consider the following options:
- Pay the amount owed;
- Appoint a Voluntary Administrator; or
- Appoint a Liquidator.
Lawler Partners’ Business Reconstruction and Insolvency team can provide specific advice on the impact of the legislation and the steps to take for a director to minimise his/her personal exposure.
For specialist advice on all insolvency matters contact Partners, John Vouris or Brad Tonks in Sydney on 02 8346 6000 or via jvouris@lawlerpartners.com.au or btonks@lawlerpartners.com.au or in Newcastle contact Ray Tolcher on 02 49 622 294 or via rtolcher@lawlerpartners.com.au
