With the changes to our tax system that are anticipated in the Federal Budget which will see higher personal rates of tax for high income earners and lower company taxes, it stands to reason that use of corporate vehicles to conduct businesses is likely to proliferate. After all, if corporate structures can be used validly to reduce a tax liability and provide a measure of asset protection, it would be sound financial and accountancy practice to use corporate vehicles to conduct business operations as often as possible. But what is often forgotten by those who set up companies to run their enterprise, is the duties that the directors become subject to under the Federal Corporations Act.
Quite apart from using care and diligence in managing the companies affairs, any director has an obligation to act in good faith and to act in the interest of the company (even of their own personal interests), to avoid conflicts of interest between their own and the company’s interests, to act honestly and to use the company’s intellectual property and confidential information for the benefit of the company and not themselves.
Whilst these obligations might seem to simply accord with common sense, they often become of greater importance when the company goes into liquidation or receivership. It is at that point in time that the action of the directors of the failed company become very closely scrutinised and if there has been any breach of duty, a director can be pursued personally.
Where a director of a company has known or ought to have known that the company was in financial difficulties and unable to pay its debts as they fell due, then under the provisions of the Corporations Act, a director can become personally liable for the debts incurred during the period that the company traded whilst is was insolvent.
So while the use of a corporate vehicle makes a lot of financial sense when running a business, it is critically important that directions appreciate and remain competent of the duties that they owe and seek professional advice if concerns arise about the performance of the business or potential conflicts of interest.
Schultz Toomey O’Brien
Ph: (07) 5413 8900
Fax: (07) 5413 8958