Corporate Governance and Avoiding Director Liabilities

How have Director penalty notices (DPNs) recently increased accountability for directors and what impact should this have on corporate governance?

According to online statistics, the ATO issued over 25,000 DPNs to company directors in the 2023-24 financial year. The ATO also has indicated ‘We're changing our approach to collecting unpaid tax and super’ taking a firm stance and focusing on business who do not engage.

Directors need to ensure that there is good corporate governance within their organisations, and, if in trouble focus on key areas including:

• Enhanced Financial Oversight - Adopt more rigorous financial oversight and compliance mechanisms.
• Proactive Risk Management - Become more proactive in monitoring and addressing tax liabilities to prevent triggering lockdown DPNs.
• Improved Director Engagement – Be more actively involved in understanding company finances and compliance.
• Deterrence of Illegal Activities – Do not engage in phoenixing or any other unethical practices.
• Compliance Culture - Foster a stronger compliance culture and adherence to regulatory obligations.

Your session on Business Transactions and Insolvency covers insolvent trading. What are the key red flags directors should look out for to avoid breaches?

The case of ASIC v Plymin, Elliott & Harrison [2003] VSC 123 included a list of insolvency indicators. If any of the below things (or similar) are taking place, directors should take action.

• Continuing losses.
• Liquidity ratios below 1.
• Overdue Commonwealth and State taxes.
• Poor relationship with present Bank, including inability to borrow further funds.
• No access to alternative finance.
• Inability to raise further equity capital.
• Suppliers placing [company] on COD, or otherwise demanding special payments before resuming supply.
• Creditors unpaid outside trading terms.
• Issuing of post-dated cheques.
• Dishonoured cheques.
• Special arrangements with selected creditors.
• Solicitors’ letters, summons[es], judgments or warrants issued against the company.
• Payments to creditors of rounded sums which are not reconcilable to specific invoices.
• Inability to produce timely and accurate financial information to display the company’s trading performance and financial position, and make reliable forecasts.

Can you share key strategies that directors can use to protect their assets and fulfill their obligations during business transactions?

Directors can safeguard themselves from personal liability by ensuring they have sufficient insurance coverage, exercising caution when offering personal guarantees, and staying updated on legal requirements. By utilizing these strategies and taking proactive steps to mitigate risks, directors can effectively navigate challenging financial situations and fulfill their duties.

Directors’ and Officers’ (D&O) Insurance – Generally, this is designed to cover to directors in respect of liabilities and legal costs of defending claims against them made by the company or third parties. Directors should ensure that their company maintains adequate D&O insurance, review the terms and coverage limits of policy and consider purchasing additional coverage if required.

Evaluating Personal Guarantees - Directors must exercise due diligence when offering personal guarantees to secure loans or other obligations on behalf of the company. Prior to agreeing to a personal guarantee, directors should thoroughly assess the associated risks and implications, obtain legal advice if necessary, and explore alternative options.

Staying Informed - Directors must remain informed about changes to legal and regulatory requirements, including amendments to directors' duties and insolvency laws. By keeping up to date with developments within the legal framework, directors can ensure compliance with their obligations and take proactive measures to mitigate personal liability risks.

With your background in governance and mediation, what steps would you recommend directors take to address disputes arising from financial pressures?

I would recommend that all directors are proactive in identifying and assessing any potential dispute which may arise, if that be from financial pressure or otherwise. This may include monitoring early warning signs, reviewing financial reports and risk assessments and seeking stakeholder feedback.

Should a dispute arise, seek professional advice as soon as possible. It may be that the dispute can be mediated and resolved without the need for costly and stressful litigation.

Engaging in structured mediation includes:

• Setting ground rules for discussions - to establish a framework for respectful and constructive discussion and negotiation.
• Use of an independent mediator - to guide discussions and find common ground in an impartial manner.
• Focus on Interests - explores the underlying concerns of all parties rather than their stated demands.
• More creative and agreeable solutions – this can be achieved by a mediator who has had experience in litigation and trial process.

By taking these steps, directors can effectively manage disputes while maintaining the trust of stakeholders and protecting the company’s relationships and long-term viability.