In April 2011, the founder of a substantial property development group was convicted of dishonestly using his position as a director of companies in the group to obtain an advantage for himself to the tune of about $2.8million. He was sentenced to a term of imprisonment of three and a half years. Last year, the NSW Court of Criminal Appeal affirmed the conviction.

The director in question used his position as a director to sign some cheques from one company in the group to another, which then paid him personally an amount, which was wrongly characterized in the books as “commission and management fee”  for introducing two properties to the group that were available for acquisition.  The truth of the matter was that the director had made no such introduction. The truth was that the payments were distributions to the director of unrealised capital profits thought by the director to have accrued but not the subject of any formal valuation or accounting entries.

At the time that the payments were made, the group was profitable, the companies were solvent, and the payments had the approval of the sole shareholder (the director) and had been disclosed to the chief financial officer. Moreover, the payments did not directly disadvantage any third party and the director had obtained advice from Price Waterhouse Coopers in relation to the payments and how they should be recorded in the books of the company.

The director said that he had been engaged on a full time basis with the group for over two years.  He had made an initial investment of about $750,000 and had raised a considerable amount of money.  He had not received any return nor paid himself any wages. He said that the payments, which were made to him were “fair” in those circumstances.

None of that was an answer to the prosecution’s case.  All that was important was that the manner of payment to a related party of the group’s funds was not truthfully recorded in the group’s books of account.

So, it is of critical importance that directors of companies discharge their duties as directors with complete honesty. If you need help with matters of corporate governance, the commercial law team at Everingham Solomons would be happy to help because Helping You is Our Business.

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