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Most businesses operate as a company because of the protections it provides directors from personal liability. However, where a company has breached its obligations under the law due to your actions, the Courts might find that you are personally liable for the breach and may even face jail time. Furthermore, personal liability can arise even if you do not directly or intentionally break the law. In this article, we explain the consequences of breaching directors’ duties and your personal liability as a director.
If you are a company director, complying with directors’ duties are core to adhering to corporate governance laws.
This guide will help you understand the directors’ duties that apply to you within the Australian corporate law framework.
What Are the Different Types of Personal Liability?
A company is a separate legal entity, meaning other parties can sue it. Even though the directors are the critical decision-makers with control over the company, they are only liable for the company’s actions in limited circumstances.
Generally, there are three scenarios where directors will be personally liable for the actions or inactions of a Company. We outline these in the table below.
|Personal Guarantee||The director has provided a personal guarantee of the Company’s debt or other obligation.||The Company borrows money from a bank. Its director promises the bank that if the Company does not repay the loan, the director will be liable to repay the loan. The terms of the guarantee may require the director to provide security, such as security over their personal property.|
|Statutory Guarantee||The law automatically makes the director personally liable for the Company’s obligation.||The director might be personally liable to the Australian Taxation Office (ATO) if a Company does not fulfil its obligations to pay:|
+ goods and services tax (GST);
+ payroll tax (PAYG); and
+ superannuation guarantee charges (SCG).
|Breach of Directors’ Duties||The director has not acted in accordance with their legal duties in their control of the Company.||The director caused the Company to trade while it was insolvent, and the director had reason to suspect it was insolvent. The Company cannot repay the debts it incurred while insolvent. As a result, the director may be personally liable for:|
+ a compensation claim by the liquidators of the company; or
+ a claim by the creditor for the debt payable.
Directors can also face civil and criminal penalties for breaches of directors’ duties.
When Does Liability Arise?
In the scenarios described in the table above, liability would arise at different stages. For example, a director can remain personally liable for losses resulting from insolvent trading that occurred during the director’s term:
- after administrators are appointed to the company;
- after liquidators wind up the company;
- after the director resigns from the company; and
- within six years of the company being wound up.
Personal liability can also extend to individuals who are:
- shadow or de facto directors who unofficially control or influence the company and play the role of a director without a formal title;
- passive directors who are not involved in managing the business affairs and do not have a reasonable excuse for doing so, such as illness; and
- alternate directors who hold directorships temporarily.
In this instance of statutory guarantees for company debts, you can be held personally liable even if these debts existed before your appointment as director. Suppose the company appoints you as a director, but the company owes GST, PAYG or SCG to the ATO. In that case, you will become personally liable for those debts within 30 days of being appointed, even if you resign. As a result, it is essential to review the company’s financial statements before accepting a position as a director.
Who Can Commence Proceedings Against a Director For These Claims?
If a director breaches their obligations or duties to the company or under the Corporations Act, proceedings may be commenced against them by:
- the company or its shareholders;
- third parties, including creditors or insolvency administrators or trustees in bankruptcy; or
- regulatory authorities, for example, the Australian Securities and Investments Commission (ASIC).
What Are the Consequences For Breach Directors’ Duties?
There are three potential consequences for breaching directors’ duties, including:
- civil and pecuniary penalties, such as compensation and fines;
- declarations and disqualification orders; and
- criminal convictions.
1. Civil and Pecuniary Penalties
ASIC can sue a director if they breach their duties under the Corporations Act. In terms of financial orders, ASIC will usually seek:
- compensation; and
An order for compensation is where the director must pay money to the company. These orders may require the director to:
- compensate the company for losses incurred as a result of the director’s misconduct;
- return money, assets or resources improperly taken or diverted away from the company; or
- give back to the company profits that the director should not have been entitled to.
The Courts also have the power to fine the director $200,000 for a breach of their directors’ duties. However, if the breach is sufficiently serious, the fine may be equal to or below the greater of:
- the maximum penalty, which is currently $1.11 million; or
- three times the benefit derived or detriment avoided by the director’s breach.
2. Declaration and Disqualification
If the Court has determined that you have breached your duties, it must give a formal declaration that, amongst other things, details the misconduct. Once the Court gives a declaration, ASIC may apply to disqualify you from managing a corporation for a number of years.
A disqualification can prevent you from:
- acting as a director, alternate director or secretary of a company;
- participating in making business decisions that affect a substantial part of a business;
- acting in any capacity that may significantly affect the company’s financial affairs; and
- providing instructions to a company’s directors with the intention and knowledge that those other directors are likely to act in accordance with the instructions.
3. Criminal Conviction
Depending on the seriousness of the breach, you might face a criminal conviction. The typical jail sentence is up to 5 years, but for more serious offences can be up to 15 years. Whether you have committed a criminal offence depends on:
- the type of duty you breached; and
- your intentions; or
- the objective standards of ordinary people.
For example, if you do not act in the company’s best interest, this ordinarily gives rise to a civil breach. However, if you recklessly or dishonestly fail to act in the company’s best interest, this gives rise to a criminal breach.Continue reading this article below the form
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As a company director, you can be found personally responsible for personal guarantees and statutory guarantees for company debts or breaches of your directors’ duties. Your liability can exist even when you cease being a director or are not actively involved in the wrongdoing. As a result, you might face:
- serious financial penalties in the form of compensation orders and fines;
- the prospects of being banned from managing companies; and
- potential jail time.
If you have any questions about your liability as a company director, our experienced disputes lawyers can assist you as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.
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