Traps for Directors – Part 2
Minority board position
In the James Hardie case, Justice Barrett . reminded directors that board minutes should reflect each individual director’s position, being to support a motion, abstain or agree. Since board decisions are made by the majority however, a minority director will effectively be stuck with any board decision to trade on a company which is at risk of being insolvent.
At that point, if the minority disagree, the minority needs to resign or face an ongoing personal insolvent trading risk. They are not absolved from a liability created by the act of the board, simply by being in the minority director and voting against a majority decision to trade on. Trying to obtain court relief from any liability once litigation has started is difficult and expensive.
If the resignation reduces the company board number below its constitutional or statutory minimum, it may be that the resignation is not effective and ASIC may not accept the official change of director form. Also, no one will replace a director if an insolvent trading risk exists in the company. Sole director’s face the same problem.
To add to the conundrum, the minority director cannot force a voluntary administration appointment. They might seek a court ordered winding up, after getting leave of the court. They might also approach ASIC, in the hope it investigates the company’s insolvency and takes action.
If you have any concerns about your position, please contact us.
The “phoenix” company transaction has been well publicised. It comes in many forms, but usually involves starting a fresh company (the “phoenix” – Newco)with the same director(s), transferring the key old company assets to it at undervalue and leaving behind unwanted creditors, such as the OSR for payroll tax or land tax and the ATO, who are not required for further trading. Part of the ploy is that no money is left behind in the old company to enable the liquidator to the old company to afford to chase Newco or the former director(s). Directors should be aware of the dangers of attempting this. These transactions can usually be attacked by a liquidator as a voidable transaction, or a breach of director’s duties. This can lead to compensation orders against the directors. Any advisor involved could also be liable for aiding and abetting that breach. ASIC has a real interest in these transactions. Directors could face criminal sanctions and monetary penalties if dishonesty is involved.
Please direct any queries you might have in relation to this issue to James Hamilton at firstname.lastname@example.org.