Corporate governance errors can be costly

22-August-2016 Commercial Disputes By Mel Collins

Corporate misgovernance can lead to shareholder disputes or breaches of directors duties. It can also result in costly litigation. Below we have provided some tips on how to prevent disputes arising in your company.

Mr Evatt Styles, a senior solicitor at Streeterlaw, said it is not uncommon to see poor corporate governance leading to shareholder disputes and a breakdown of trust between two or more parties.

“Proactive corporate clients see the benefit of, and the investment in, proper corporate governance as a priority,” Mr Styles said. “Creating a transparent, professional and documented process reduces exposure to risk and ensures that any decisions of the board are independently evidenced for external review if required.”

Proper preparation and planning for corporate governance reduces the risk of internal disputes.

The following story illustrates what can happen when company directors fail to maintain the company register:

Ivan and Terry are both directors of a company and have had significant issues regarding the management of their business. Both directors have, up until now, put up with each other as they have their own area of interest within the corporation. Ivan is responsible for the Company Secretarial work and has concerns that Terry has failed to adequately disclose a number of transactions which he has made in relation to the corporation and is using company information improperly for his benefit. It is unclear what the shareholdings are as there were a number of transactions transferring shares between Ivan and Terry, however these had not been documented. The Company Register (company folder with all journals and minutes) is held by Ivan, who said, “Look I’ll get around to it. I have just been very busy running the business”.

Ivan takes the company folder and seeks advice on how he can resolve an impasse with Terry. Ivan is distressed when his legal representatives provide him with a long letter of advice of all the Company Secretarial/Corporate Governance issues, which will need to be addressed prior to initiating proceedings. He had wanted to seek the court’s assistance immediately and is frustrated that a number of steps are required before he can obtain a remedy from the court.

Ivan could have prevented this issue from arising had he carefully documented and updated the Company Register.

Streeterlaw Principal Mark Streeter said the company has an obligation to update the minute books within one month of the resolutions being made (Section 251A). “This is a strict liability offence if these provisions are not complied with,” he said. “The out-of-date company register does not prevent quick court assistance, it just prevents the parties from relying on the presumption that the contemporaneous record of the minutes is an accurate account of the resolutions passed.”

Don’t neglect your director’s duties

Company secretarial work is not something that should be left to the last minute or put off – it needs to be maintained on a regular basis.

If a company secretary has not been appointed who maintains (subject to the Constitution of the company) the Shareholders’ Agreement, Company Folder and administrative tasks of the company (eg. taking minutes of directors’ and members’ meetings, maintaining the Company Register and completing and lodging ASIC forms) then pursuant to Section 9 of the Corporations Act 2001, this responsibility will fall with the officer of the company, which is often the director.

A failure of a director to take all reasonable steps to ensure a company fulfils the requirement to correctly record and explain transactions – documenting the company’s financial position and performance – may be seen as a contravention of the Corporations Act.

Furthermore, if a company fails to keep adequate financial records and an issue arises regarding insolvent trading of a director, the company will consequently be presumed to be insolvent.

Symptoms that a company is being poorly administered

The following errors in corporate administration can lead to costly consequences:

  1. Failure to keep minutes – Failure to issue proper notices of meetings of members, or to document minutes or the transfer of shares, may result in confusion regarding the company’s affairs. This is often resolved by way of expensive proceedings in the Courts to obtain declarations by directors and shareholders in relation to the validity of any meeting.
  2. Failure to update the Company Folder – In the event that proceedings are commenced in relation to a corporation, often the Company Folder is the first document delivered up to the Court. It is the prime face evidence of all transactions, decisions or minutes.
  3. Incomplete minutes of meetings – Directors should disclose any potential areas of conflict, such as obtaining loans from the company to another company or transactions, which may be seen as director-related. These should be documented in the minutes to avoid any allegations of misconduct or breaches of duties. Obviously, the disclosure and authorisation of such transactions are subject to the rules of the corporation set out in the constitution (sometimes referred to as the Articles of Association).
  4. Outdated share register – Corporate officers are sometimes frustrated by the time it takes to issue new shares or to sell or buy new shares as required by the constitution. However, all companies are required to keep the Company Register up-to-date and failing to keep the Share Register or Share Certificates current can result in further costs being incurred.

If you require confidential advice, please contact Senior Solicitor Mr Evatt Styles or Streeterlaw’s Principal, Mr Mark Streeter – an Accredited Specialist in Commercial Litigation on 8197 0105 or email advice@streeterlaw.com.au

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