Bill threatens directors

BEING a company director is becoming an unattractive option as the liability burden jumps.

Until fairly recently, liability remained with the company and not with individual directors.

Arthur Robinson & Hedderwicks partner Steven Cole said, since the 1700s, it had been held that only capital was at risk in companies.

In the early 1990s, laws were passed to make directors personally liable for debts their companies incurred if trading while insolvent.

Under the Corporations Law Eco-nomic Reform Program, directors’ liabilities increased further.

Directors’ liabilities were extended to include certain environmental and trade practices issues.

Now a Bill currently before the Federal Parliament threatens to add further to directors’ liability burdens.

The Liberal-sponsored Corpora-tions Law Amendment (Employee Entitlements) Bill proposes the extension of the insolvent trading provisions to cover employee entitlements.

It has also added the concept of “uncommercial transactions” to that provision.

If the Bill becomes law, it will be a criminal offence for anyone to deliberately avoid paying an employee’s entitlements.

The proposed penalty is a $100,000 fine or ten years imprisonment.

However, Labor Senator Steven Conroy has added an amendment

that extends the liability beyond directors to related body corporate organisations. This essentially eroded the firewalls between companies in groups.

The amendment has been rejected for the moment.

Australian Institute of Company Directors CEO Ian Dunlop said Australian company directors faced more onerous conditions than their colleagues in most other countries.

Mr Dunlop said that adding the uncommercial transactions provision to the Bill would make it very difficult for directors to function.

“Business is moving faster and the risks are arguably greater,” he said.

“This puts courts in the position of having to second guess directors. Our concern is the courts can apply the benefit of hindsight to commercial decisions.”

Mr Dunlop said the Labor amendment undermined the Australian

corporate structure.

“It hits at the very ability to fund organisations,” he said.

“What’s more, the parent company can become liable for the debts of any subsidiary.

“At a time when we’re promoting ourselves as a global financial centre, this could make us a laughing stock.”

Minter Ellison senior associate Leith Ayres said the general view was that the terms of the Bill were admirable but the current format was not the way to achieve the desired aims.

“The separation between companies and directors is becoming very small,” Mr Ayres said.

“In terms of risk, it is almost breaking companies down to the level of sole traders. This could be a real economic disincentive.”

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