Corporate Governance
There is no simple universal formula for good corporate governance. Companies vary greatly is size, complexity, industry, ownership structure and other characteristics that what is ideal in some cases may be inappropriate in others. Tried and proven structures and processes can help to improve corporate governance, and can play an important role in building shareholder confidence in the soundness of their investments and thus a company's ability to attract capital.
It is important to appreciate the consequences of being sued under the Corporations Act (CA) and that both creditors and shareholders have a number of ways of bringing legal action against all the officers. Directors should be fully aware of their statutory responsibilities in governing a company, the main directors duties are set out in section 180-184 of the Corporations Act and the duties include:
- Exercise care, skill and diligence s 180 CA
- Act in good faith s 181 CA
- Not to misuse the officer's position s 182 CA
- Not to misuse information s 183 CA
- Not to act dishonestly s 184 CA. This section represents a criminal offence.
Insolvent trading is another main responsibility for directors. Corporations must not trade while they are insolvent because creditors are being unfairly put at risk. Under s 588G CA a director will be personally responsible for debts incurred by the company if there are reasonable grounds for 'suspecting' that the company is insolvent and continues to trade. The objective test is whether a reasonable person in a like position would continue to trade. This is a criminal offence.
A directors' defence is provided under the CA by the Business Judgment Rule s 180(2). Directors are seen to be complying with their statutory duties if they meet each of the following:
- The business judgment was made in good faith for a proper purpose
- The officers do not have a material personal interest in the events
- They inform themselves about the subject matter
- They rationally believe that the judgment is in the best interests of the corporation
- Directors & officers insurance should be taken out by the company on behalf of directors.
Consequences of breaching duties range from civil to criminal. Fines are on penalty unit basis with one penalty unit equal to $110 and range from $137.50 (1.25 times a penalty unit) for a technical breach to $220,000 (2000 penalty units) for more serious breach. The more serious breach may result in disqualification from taking part in the management of any company for up to 5 years and or five years imprisonment for criminal breaches.
