An interesting article has been published on the liability of directors based on the recent court decision on Centro.
Many small business owners will consider that these types of rules do not apply to them, but in fact they do. In this case, the non-executive directors relied, at least in part, on the results of an external audit by a highly reputable external accounting firm, that their company was not insolvent. Clearly, for a large company which is likely to consist of multiple entities, this can be extremely complex to assess, and hence the need to resort to a top tier accounting firm to pick through the structures and accounts.
Even though you may argue that the non-executives did all that could reasonably be expected to ensure solvency, the courts disagreed.
While these complexities don’t exist for most small businesses, there can still be big risks where there are multiple partners, some of whom may not be as active as others, or who might be even silent partners. All directors are equally liable; in legal jargon, jointly and severally.
It is not an excuse that you thought your partner was taking care of the accounts. This is particularly a risk in small business where financial systems reporting is poor. Often no-one knows the true financial position of the business.
It is illegal to trade while insolvent irrespective of the size of the business. While the finances of a small business will be orders of magnitude simpler than those of Centro, the risks are still high for the directors of small businesses whose Business Management Systems are weak, to non-existent.
All directors should understand the duties and operations of their Small Business Board, even if it is just husband and wife. You don’t need an oak panelled board room or expensive sophisticated reporting systems software, just a Business Management System fit for purpose for your business operations. With such a system, not only will your business be able to stay in the black, but you will also be able to improve your businesses performance, so there is a ready payback for the investment.
May Your Business Be - As You Plan It.
Over to You. What do You Think? Post Your Comments Below.
Dr Greg Chapman is the Director of Empower Business Solutions and The Australian Business Coaching Club and is Australia's Leading Advisor on Emerging Businesses and provides Coaching and Consulting advice to Australian Small Business Owners in Marketing & Business Strategies Planning & Systems. He is also the author of The Five Pillars of Guaranteed Business Success and Price: How You Can Charge More Without Losing Sales.
The Australian Small Business Blog