Small business owners and directors have received a timely reminder of their legal obligations in managing the money and assets of their companies.
The Australian Securities and Investments Commission (Asic) has warned small-business directors that the misuse of company money and assets for personal gain can lead to companies being unable to pay their debts, harming other small businesses who are creditors.
The reminder follows recent action that has been taken against company directors following Asic investigations. One case involved a director of two construction-related companies who was alleged to have dishonestly used her position as a director to gain an advantage for herself by transferring company funds to a credit card and other accounts and using the funds for her personal use. The two companies subsequently went into liquidation, with one of these owing money to small businesses that has yet to be repaid.
Another case involved a director of a beverage distribution company who was found guilty by a court for dishonestly using his position to gain an advantage by using company funds to pay legal fees and other costs to annul his personal bankruptcy
These cases relate to reports lodged by registered liquidators from 2023-24, which found that poor financial control, including misuse of company assets for personal purposes, was a cause of 36 per cent of company failures. In addition, from January to March this year, Asic has prosecuted 34 individuals for 67 offences in failing to assist registered liquidators, resulting in $244,500 in fines and $4360 in costs.
Asic has pointed out that company directors have legal obligations to ensure they act in good faith in the company’s best interests ( which may involve considering the interests of shareholders, customers, suppliers, employees and other stakeholders) and not improperly use their position to gain an advantage.
In particular, Asic highlighted:
- Directors are managing company money, not their personal money, and they cannot treat company property, assets or funds as if they are their own to pay personal expenses.
- Directors must consider the interests of their company as a whole when making decisions about company assets and money.
- Directors have a legal obligation to act in the best interests of their company, which includes paying small business creditors, employees and tax debts when due.
The regulator warned that misuse of a company’s money and assets can lead to a company not being able to pay its debts, which can cause significant harm to the community (through unpaid tax debts), employees, customers, suppliers, and even creditors as the disruption to cashflow can impact their own ability to cover expenses and pay suppliers.
Company directors who are found to be misusing the funds and assets of their companies will not only be subject to legal action by Asic, which may include civil and criminal penalties that may result to their disqualification from acting as a director of a company..
Erring directors may also be subject to actions by the Australian Taxation Office for unpaid company tax debts. And if a company goes into liquidation as a result of such misuse, the liquidator tasked to investigate the reasons for the collapse of a company may sue the director seeking compensation and will be duly supported by Asic.
Asic has advised company directors to seek professional advice if they are uncertain about their legal obligations or have concerns about the company’s finances. It is important to seek this advice early to avoid trouble. In addition, Asic’s website has a small business section, which contains information to assist small business company directors in understanding their obligations as company directors.
