All care, no responsibility?… umm, not really!

It’s a fascinating cliché, albeit one with little truth most of the time.

It certainly does not apply to Company Directors, who need to take a lot of care in fulfilling their fiduciary roles, and who also must take ownership of a great deal of responsibility. The role is not all fame and glory, and if carried out diligently, should also involve a lot of hard work.

In general terms, Director’s duties require them to:

  • Know what the Company actually does – that seems obvious, right?
  • Act honestly and in the best interests of the Company, staff and shareholders.
  • Be careful and prudent in the management of funds.
  • Make sure that proper financial records are maintained.
  • Use information gained from the position of Director ethically.
  • Ensure that the Company can pay its debts.

These duties seem fairly obvious, but in order to perform them to the degree expected by the regulators, there is a lot of work involved under the hood. Directors need to be involved, and not simply rock up to the odd Board meeting.

It is the last item on the bulleted list that is the focus of this article. Directors need to be confident that the Company can pay its debts, both at the time of annual reporting and over the next 12 months.

Let’s get a motion moving

It is important to be aware of the Company’s Review Date. This will usually be on the recurring 12-month anniversary of the initial registration date of the Company. Various annual reporting requirements are based upon this date.

Such is the case with the solvency statement. It is a requirement that within 2 months of the Company review date, a meeting be held and a resolution be passed that states clearly and unequivocally that in the opinion of the Directors at the time of the meeting, the Company can pay its debts, both at that time and within the next 12 months.

It may be that even after analysing the financials and full discussion of the circumstances that Directors have differing views on the matter. As with other resolutions, a majority vote is needed, and in the event of a tie vote the Chairman’s vote will carry the motion.

This solvency resolution may therefore have two outcomes—positive, or negative. Hopefully, the Company will be profitable, and a positive solvency statement is carried. If so, no notification to the Australian Securities and Investment Commission (ASIC) is required, though of course, as with all other Company documentation, the resolution must remain on file.

If the result is negative, that is, the majority of Directors don’t believe that the Company can continue to pay its debts, then ASIC needs to be advised. This involves lodging the appropriate form with ASIC within 7 days of the end of the 2-month period from the review date.

As may be deduced from the above, in order for Directors to diligently fulfil their fiduciary responsibilities, they must make it their business to be involved, to find out, to ask questions. Only then, can they make proper judgments of such important matters as solvency.

Ignorance is no excuse, and Directors who are negligent, or at worst dishonest, will face the full consequences of the law. And a phrase often recounted in law offices applies here: He or she who is silent, is assumed to consent.

Business Law – count on us. It will be easier with sound legal advice from the experts. Owen Hodge Lawyers. We are here to help.