Director's Liabilities - The List Goes On Most company directors are aware of the potential personal liability that they may incur if they do not prevent insolvent trading by the company they administer. What many directors do not realise, is that insolvent trading is also an offence and, consequently, criminal penalties may flow from breaches of the statutory provisions.   A case last month in the County Court of Victoria is a salutary reminder of the potential criminal consequences of incurring debts when a company is insolvent. The Court imposed a 12 month prison sentence on a director who had pleaded guilty to criminal insolvent trading. The significant sentence was part of a longer overall sentence for offences which included theft and misrepresentation.

Convictions for insolvent trading are uncommon and criminal proceedings are generally instituted only in cases where there are significant losses or the matter is considered to be in the public interest. Regardless, criminal conviction and imprisonment have been imposed in the past for insolvent trading offences. The penalty in the recent case is not a ‘first’.

The relevant provisions under the Corporations Act impose a positive obligation on company directors to prevent insolvent trading by a company – breaching this obligation can potentially expose a director to personal liability for debts so incurred. The offence of insolvent trading, and the corresponding criminal sanctions, may follow where the insolvent trading involves actual suspicion of insolvency and an element of dishonesty.

Whilst in the recent case there was no criminal trial as such – with the director’s guilty plea – the penalty demonstrates the Court’s preparedness to impose custodial sentences for serious ‘white collar’ offences.

Occupational Health & Safety Legislation

As its implementation date approaches, directors should also be mindful of the new requirements imposed under the new national occupational health and safety (OH&S) legislation. In New South Wales, the Model Work Health and Safety Act is scheduled to come into effect on 1 January 2012.

The Act imposes a positive obligation on an officer of a company (as defined in the Corporations Act) to exercise due diligence to ensure that the company complies with its duties and obligations under the Act. Due diligence requires an officer to take reasonable steps to gain and maintain knowledge of OH&S matters, understand the nature of the company’s operations and the associated hazards and risks, and to ensure that the company introduces and applies appropriate processes and resources to comply with its statutory OH&S obligations.

If an officer breaches this positive statutory duty, the personal liability can be severe. Depending on the nature of the incident, and the level of recklessness or culpability, penalties can include fines of up to $600,000 and/or imprisonment for 5 years.

Under the Act, an officer cannot delegate his/her positive duty to exercise due diligence. With such significant potential personal liability, company officers (including directors) should ensure that appropriate processes and resources are in place, and reviewed on an ongoing basis, to enable them to comply with their positive obligations.

Director Penalty Regime

Finally, the latest update on the proposed changes to the director penalty regime, announced in this year’s Federal Budget. As advised in the last edition of eInsight, the legislation was introduced into Federal Parliament in October. The legislation was referred to the Senate Economics Legislation Committee which reported to Parliament on 21 November.

The upshot of the Committee report was that the proposed amendments to the director penalty regime were put ‘on hold’. The Government has expressed concern that the amendments may have application beyond the intent of the policy – ie., to curb fraudulent phoenix activity. Further refinements to the legislation are being considered and Assistant Treasurer Bill Shorten has suggested that legislation may be reintroduced into Parliament in 2012.

For specialist advice on all insolvency matters contact Brad Tonks on 02 8346 6013 or email btonks@lawlerpartners.com.au