Michael Dunn, the ASIC’s Director Communication, discusses the requirements directors must meet to keep the market informed of their trading and financial position.
With so many individual Australians directly owning shares in companies listed on the ASX, now more than ever, listed company directors must maintain high standards of disclosure and corporate governance, regardless of economic conditions. In recent times, the financial troubles of a number of listed companies with its distressing aftermath for shareholders, investors, employees and others have highlighted just how important it is for company directors to continue to uphold these standards.
What company directors must do Under the law, company directors must ensure that the company is solvent. In other words, you have to make sure the company can pay its debts as they fall due. If the company becomes insolvent, it must stop trading and call in company administrators to protect the company's creditors. To protect shareholders in companies listed on the Australian Stock Exchange, you must also ensure that investors can buy and sell their shares in an informed market. Recently a number of companies have warned the market that their profits will be lower than expected, because of tougher economic conditions. Directors of these companies are doing the right thing in warning the market, and making sure that investors adjust their expectations of future earnings and dividends.
Insolvent trading ASIC investigates and enforces the law against insolvent trading. Recently when we suspected that a listed public company was facing financial trouble, we wrote to the company and asked the directors to give us a written assurance that they believed the company was still solvent. In November 2000, we took action against three directors of Water Wheel Holdings Ltd and its subsidiary Water Wheel Mills Pty Ltd. We alleged that by allowing the companies to continue to trade after they had become insolvent, significant losses were incurred by unsecured creditors. We are seeking compensation orders against the directors for $4.5-5 million which, if granted, would be available for pro-rata distribution to all unsecured creditors. In December 2000, we started proceedings to obtain financial penalties against company officers of The Satellite Group Limited in relation to other alleged breaches of their duties as officers. These charges followed our investigation into the activities of Satellite, to which an administrator was appointed in November 2000. In 2001, two company officers were charged with breaching their duties as officers to gain financial advantage.
The message is clear – if directors allow a company to trade, knowing that it cannot pay its debts as they fall due, they risk severe penalties. The courts may also force directors to contribute their own money towards the company's debts.
Continuous disclosure We also enforce the law that requires directors to keep the market and investors properly informed, and are currently investigating a number of major listed companies in relation to possible market disclosure and corporate governance offences. Difficult economic circumstances increase the pressures on companies, and directors can be tempted, at their peril, to put off announcing bad news and calling in company administrators. The ASIC and the ASX are taking a higher profile in getting listed companies to keep the market informed about their financial position and performance, especially in the high technology sector. A joint study by the ASIC and the ASX last year showed that some newly listed companies in the technology sector were ignoring or unaware of the basics of good company disclosure.
What shareholders must do When listed companies get into financial trouble, shareholders end up at the back of the queue when creditors move in to salvage what they can. So shareholders must be able to understand what the law protects them from and what it doesn't. The law gives investors the right to certain information. Whether shareholders use it or not is their own business. The ASIC urges shareholders to use and assess the information that companies disclose. If a company fails, shareholders often get nothing and their shares become worthless. So it's crucial to understand the business, study a company's financial statements and assess the skill and candour of company directors and managers.
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