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- ASIC has deployed two new enforcement teams specifically tasked with detecting practices that shortchange small business creditors.
- Commissioner Kate O’Rourke says, “the fundamentals have not changed”.
- Directors need to proactively think about and manage risk. The more time they have to craft a solution, the more likely the solution will be successful.
The first warning sign in a boardroom rarely looks like a full-blown crisis. More often, it starts as an operational headache such as a temporary cash flow squeeze, accumulating unpaid invoices or suddenly drawn-out payment terms.
Historically, a board might have left early signs of friction to the executive team to iron out. But in today’s regulatory environment, taking a “wait and see” approach to tightening cash flow is no longer just poor strategy, it’s a major governance risk.
ASIC is putting directors on notice. Leaning into its role as an “extremely active enforcement agency”, the regulator is rolling out heavy-hitting, deterrent actions to protect small and medium-sized enterprises (SMEs) it considers the true “lifeblood of the economy”. The regulator has deployed two new enforcement teams specifically tasked with detecting practices that shortchange small business creditors, with a clear mandate to fast-track more criminal cases to the Commonwealth Director of Public Prosecutions.
According to ASIC Commissioner Kate O’Rourke, “the fundamentals have not changed”, directors are still expected to thoroughly understand their company’s financial position, take an active role in decision making and act in the best interests of the company. What has changed is the focus – enforcement.
For directors, the margin for error is shrinking. If a cash flow squeeze, sloppy record-keeping or a dip in liquidity is mismanaged, it ceases to be just a corporate problem and can become a direct path to personal liability. The board’s duty to act doesn’t begin at the moment of formal insolvency. It starts the moment they sense the first strain on the balance sheet.
To protect themselves and the business, directors must move beyond passive oversight well before there are any signs of trouble.
Understand your financial position
“From a good governance perspective as a director, you should be across the company’s financial position,” says Kathy Sozou, restructuring partner at McGrathNicol.
“Have a robust financial system in place that gives you good financial reporting and ensures you aren’t passively receiving information.”
But an understanding of the company’s financials doesn’t stop at its sales or profit. “Make sure you understand your liquidity, cash cycle and short-term cash flow forecasts,” says Sozou.
She suggests asking questions such as, “do we have the working capital to support our growth?”, “are we selling to people who will be able to pay for the service or product?” and “are sales legitimately high or have we discounted to the point that we’re actually loss-making, but our financial reporting hasn’t caught up?”
Proactively manage risk
“Make sure you’re proactively thinking about and managing risk,” says Sozou. “The more time you have to craft a solution, the more likely the solution will be successful.”
According to Michael Fingland, CEO of Vantage Performance, regularly undertaking a stress test is essential to managing risk. Namely, by picking the top several performance areas where stress would show (that is, declining margins, decrease in sales volume, etc) and modelling them through P&L, balance sheet and cash flow, businesses can ascertain the potential impact to the business.
From there they can develop an action plan, which helps to safeguard the business and also demonstrates proactivity as a board director.
Fingland also recommends implementing a safe harbour compliance dashboard – a one-page dashboard that lists critical items, to be checked off each month, such as up-to-date ATO lodgements and on-time superannuation and employee entitlement payments. This “no-brainer” helps to ensure appropriate checks and balances are in place.
When it comes to safe harbour, proactivity is key. “You don’t do it once and say, ‘I’m in safe harbour now, I’m all good,’” says Sozou. “It’s about conduct over the period in which you’re in this twilight zone where your business may or may not be insolvent.”
O’Rourke stresses the importance of seeking professional advice early if a director’s company is experiencing financial difficulty. “Directors need to speak to an independent professional adviser [and] they need to do so as soon as possible. Delaying may affect their eligibility for these options.”
Be a good corporate citizen
While safe harbour can give directors protection from personal liability if it’s determined the company was trading insolvent, the defence is only applicable if the entity and its directors are good corporate citizens, says Sozou.
“If you’ve paid your employees and their entitlements, and are up-to-date with tax lodgements, that’s the first gate to being eligible for this defence.”
Another aspect of being a good corporate citizen is taking conscientious actions that demonstrate planning and good intent.
- Document every decision made during financial distress. “If you’re thinking about your liquidity and forecasting a solvency position, you should be minuting this in the board minutes,” says Sozou. “You’re trying to demonstrate that you were paying attention and focused on solutions.”
- Fingland advises directors to have supplementary sessions with the management team to ensure an extra level of visibility to ask more probing questions. Don’t be worried about “stepping on the toes of the CEO,” he says. “The chair should be creating the pathway to have those discussions.”
Practical support
ASIC Commissioner Kate O’Rourke encourages directors to take advantage of available resources.
“For directors who want practical guidance on what their obligations mean in day-to-day situations, ASIC has recently launched the Small Business Director Essentials hub.
“This brings together practical guidance, tools and free online learning modules covering topics such as becoming a director, managing director obligations and responding to financial difficulty. It also includes a director roadmap and interactive learning resources designed to help directors understand what is required of them to take the right action at the right time.”
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