Consequences for Breaching Directors Duties

If you are a director of a company or are considering becoming one, it is imperative that you are aware of your legal duties and obligations under the governing legislation, the Corporations Act 2001 (Act), general law and the company’s Constitution and Shareholders Agreement. Failure to comply with your obligations can have serious consequences including up to 5 years jail time, criminal and civil penalties of up to $200,000, disqualification from managing a company and may also ultimately leave you personally liable for the company’s debts. This could potentially affect your personal assets and may lead to your bankruptcy. So what do you need to do to avoid such serious consequences? This article sets out the eligibility requirements to become a director, legal obligations and duties you must comply with to assist in avoiding the nasty consequences for any deemed breach of such duties and what to do if you suspect you have breached your directors’ duties.

Eligibility to be Appointed a Director

To be appointed as 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. You must not been deemed an excluded person by ASIC from becoming a company director (i.e. you are bankrupt, you have been banned by a Court or ASIC from running a company or you have been convicted of fraud or dishonesty related offences).

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

Legal Obligations and Duties as a Director

Once you are appointed as a company director, it is important that you know your legal obligations and duties. This is set out in the Act, general law and in the company’s Constitution and Shareholders Agreement. As noted above, the consequences for failure to comply with these duties and obligations can be severe so 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 company is separate to you and the assets of the company, therefore, remain with the company and not you personally. By understanding and treating the company as a separate legal entity and ensuring that its interests are put first above all else, you will assist in ensuring that you are complying with the obligations required by law. Some of the legal duties and obligations that a director must comply with are as follows:

• Exercise care and diligence in the management of the company;
• Act in good faith and ensuring you act in the best interest of the company and for proper purpose;
• Avoiding any conflicts of interests between yourself and the company;
• Not improperly using information or your position;
• Properly managing the finances of the company and ensuring that the company does not trade while insolvent (i.e. when the company is unable to pay its debts as and when they fall due); and
• Assist in the winding up of the company including reporting to administrators and liquidators on the company’s affairs and providing other requested assistance when required.

How the Consequences of a Breach of Duties are Enforced

In the event, the company is to be wound up through a court ordered or voluntary wind up, the administrators / liquidators of the company may commence an action against the director for a breach of director’s duties particularly if there are allegations of personal liability.

ASIC may also receive a report about breaches of director duties and decide to conduct an investigation. ASIC is the responsible body for administering the obligations of companies under the Act. Criminal proceedings may also be commenced against you.

Personal Liability as a Director under Directors’ Duties

Generally speaking, the debts of the company will remain with the company. However, there are circumstances whereby the company debts become the personal liability of the director. This is particularly following a breach of the director’s duties. The key areas for potential personal liability of a director include:

• Where a company loss is incurred by a director breaching director duties;
• Debts incurred by the company when the company becomes insolvent;
• Where a director acts as a guarantor;
• Illegal phoenix activity; and
• Other regulatory action commenced against the director.

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. This is because 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. You must also ensure you comply with the Act, general law and the company’s Constitution and Shareholders Agreement going forward.

Conclusion

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 or assistance in understanding or managing your obligations or believe you may have breached your duties, call one of our corporate lawyers now.