A company director must follow the duties set out in the Corporations Act 2001 (the Act) and those imposed by other laws. A failure of a director to fulfil these duties may expose them to personal liability, including civil and criminal penalties. One of the key duties of a director is the duty to keep proper accounts and records. In addition to this, depending on the company’s type, size, and group, the company may also have certain reporting obligations. This article will outline the reporting obligations of a director in light of their duties to keep proper accounts and records.
If you are a company director, complying with directors’ duties are core to adhering to corporate governance laws.
This guide will help you understand the directors’ duties that apply to you within the Australian corporate law framework.
Duty to Keep Proper Accounts and Records
When acting as a director of a company, you must keep written financial records that:
- correctly record and explain the company’s transactions and its financial position; and
- enable true and fair financial statements to be prepared and audited.
Directors must ensure the company prepares a financial report and a directors’ report each financial year. Likewise, they must inform themselves of accounting and recording obligations of their company depending on its size and type.
As a director, an obligation extends to ensuring your company’s records are complete and accurate. To achieve this, a director must adopt accurate accounting policies and manage the company’s financial processes.
Additionally, it is essential to note that these responsibilities will continue to exist regardless of whether you outsource tasks to a third party. Therefore, as a director, you will need to have a sound understanding of the financials of your business, even if you are employing someone to help you manage them.
Maintaining Your Company’s Book and Records
In maintaining your reporting obligations as a director, ensure your company keeps written financial records that:
- record and explain their financial position and performance; and
- enable accurate financial statements to be prepared and audited.
For example, your financial records include:
- invoices;
- receipts;
- cheques; and
- loans.
Even if somebody else holds these records, you are responsible for providing copies to auditors or anyone entitled to inspect the company’s records. Under the Act, your company must keep these records for at least seven years after the transactions are complete.
Continue reading this article below the formFinancial Reporting Obligations
Additionally, your company may be required to lodge a financial report with ASIC accompanied by a director’s declaration. The director’s declaration may include:
- whether, in your opinion as the director, there are reasonable grounds to believe that the company will be able to pay its debts as and when they become due; and
- whether the financial statements and notes comply with accounting standards and give a true and fair view of the financial position and performance of the company.
Duty to Exercise Care and Diligence
A director must also exercise their powers and duties with care and diligence. In assessing this, a court will compare the actions of a director to the level of what a reasonable person would have done in similar circumstances. This includes taking steps to ensure they are adequately informed about the company’s financial position.
Additionally, your reporting obligations as a director extend to your company’s preparation of financial reports. A director must take reasonable steps to:
- ensure that the information included is accurate;
- make sure the company has used correct accounting methods;
- ensure that any matters that should be disclosed are included.
ASIC also provides valuable information on directors and financial reporting.
Obligations as an Operating Company
The operating company is the company that conducts the business under the control of its holding company, which typically will own all of the shares in the operating company.
For your holding company to have control of the operating company, the holding company must:
- control the composition of the operating company’s board;
- have control of over 50% of the total number of votes at a general meeting of the operating company; or
- hold more than 50% of the issued share capital of the operating company.
Clients
Your operating company will be responsible for entering into all agreements with clients. They will also take on all risks and responsibilities concerning the business’ servicing of the clients.
Employees
The operating company will also be responsible for hiring all employees and contractors in the business. Indeed, if any issues arise, it will be the responsibility of the operating company.
Suppliers
Your operating company will enter into all of the supplier agreements and will consequently be held accountable for any payments and debts incurred. Typically, any creditors will only be able to claim outstanding debts from the operating company.
When a Holding Company May Be Liable
Moreover, there are situations where a holding company may be liable for an operating company’s debt. A liquidator of an operating company may recover debts from a holding company when:
- it was a holding company of the operating company at the time the debt arose;
- the operating company was insolvent when the debt arose or became insolvent by incurring the debt;
- at that time, there were reasonable grounds for suspecting that the operating company was, or would become, insolvent; and
- either the holding company or one or more of its directors was aware of the grounds for suspecting the operating company was insolvent, or it would be reasonable for one or more of the directors to suspect the subsidiary was insolvent.
Key Takeaways
If you are establishing a company, setting up a dual company structure may be the best structure for you. However, before you commit to this company structure, you should think carefully about the business’ goals. The holding and operating company will play different roles in your business, so it is best to consider:
- does your business have valuable assets?
- is your business taking on any material risks?
If you have any questions about your reporting obligations as a director, our experienced business lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.
Frequently Asked Questions
A holding company is a company that holds 100% of the shares in a subsidiary company. The holding company can own the business’ valuable assets, including intellectual property, cash and equipment, and keep them separate from the subsidiary operating entity.
An operating company is a subsidiary of the holding company. It does all the trading and will enter into contracts, hire employees, and deal with customers.
By setting up your business through a dual company structure, you can protect your holding company’s key assets. This is because your operating company will enter into most contracts (like supplier or employment contracts) and run the business’ general operations. Therefore, if there is a claim, this will usually be against the operating company. Hence, the holding company’s key assets, including IP, cash and equipment, are safeguarded.
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