Consequences for Breaching Directors Duties

If you are a director of a company or are considering becoming one, it is important that you are aware of your directors duties and obligations. If you fail to comply with your obligations, there are serious consequences which may include:

• up to five years jail time;
• penalties of up to $200,000;
• disqualification from managing a company; and
• personal responsibility to pay off the company’s debts.

So what do you need to do to avoid such serious consequences? This article explains the legal obligations and duties you must comply with if you are a director.

Eligibility to be a Director

To be a company director in Australia, you must:

• be over the age of 18; and
• have provided written consent to take on the duties and obligations of a director.

One director of the company must also reside in Australia. Furthermore, you must not be deemed an excluded person by the Australian Securities and Investments Commission (ASIC) from becoming a company director.

Before becoming a director of any company, you must ensure that you fully understand your role and legal obligations about the management of the company.

Legal Obligations as a Director

Once you are appointed as a company director, it is important that you know your legal obligations and duties. These duties are set out in the:

• law;
• company’s constitution; and
• company’s shareholder’s agreement.

As noted above, the consequences for failure to comply with these duties and obligations can be severe. Therefore, it is important that you minimise all risk from the start.

The first thing that is important to understand is that a company is a separate legal entity. This means that the assets of the company remain with the company and not with you personally. You must understand and treat the company as a separate legal entity. This will ensure that you are putting its interests first above all else and subsequently comply with the obligations required by law. Some of the legal duties and obligations that a director must comply with are to:

• exercise care and diligence in the management of the company;
• act in good faith and in the best interests of the company;
• avoid any conflicts of interests between yourself and the company;
• not improperly use information or your position;
• properly manage the finances of the company and ensure that the company does not trade while it’s unable to pay its debts (insolvent); and
• assist in the winding up of the company.

Consequences of Breaching Your Duties

In the event that the company is to be wound up, the liquidators of the company may commence legal action against the director.  This action may be for a breach of the director’s duties, particularly if there are allegations of personal liability.

ASIC may also receive a report about the breaches of director duties and decide to conduct an investigation. Criminal proceedings may also be commenced against you.

Personal Liability for Breaching Your Duties

Generally speaking, the debts of the company will remain with the company. However, there are circumstances where the company’s debts become the personal liability of the director. The key circumstances where a director may be personally responsible for the company’s debts include:

• when a director breaches their duties and causes a company loss;
• when the company becomes insolvent;
• where a director acts as a guarantor; and
• when the director registers a new company to take over the previously insolvent business (known as illegal phoenix activity).

Breaching your Directors Duties

If you believe you have breached your director’s duties, it is extremely important that you obtain independent financial and legal advice as soon as possible. The consequences for a breach of these duties is serious and it is important that you try to mitigate your potential liability quickly and efficiently. Going forward, you must also ensure you comply with the:

• law;
• company’s constitution and
• shareholders agreement

Key Takeaways

The consequences for a breach of director duties are serious and could leave you personally liable for the company’s debts. To avoid this, it is important that you understand your legal duties and obligations and have the right legal and financial team behind you. If you require advice in understanding or managing your obligations or believe that you may have breached your duties, contact LegalVision’s business lawyers on 1300 544 755 or fill out the form on this page.