Liabilities of Company Directors When Things Go Wrong

By 14 February 2019Litigation
liabilities of company directors

A private company that is registered with the Australian Securities and Investments Commission (ASIC) is a separate legal entity to that of its directors, shareholders, employees and agents.

Having a distinct legal existence and identity means that a company has the same rights as a natural person, allowing it to:

  • Own and dispose of property and assets;
  • Enter into agreements, including employment agreements;
  • Incur debt;
  • Sue others; and
  • Be sued.

While the directors of a company are generally not liable for that company’s debts or losses because the company is a separate legal entity (sometimes referred to as the corporate veil), a company director may become personally liable for such debts and losses (and so the corporate veil is pierced) if, for example:

  1. The director has breached one or more of their statutory or legal duties to the company and, as a result, loss has been suffered by the company or other parties; and/or
  2. The director has provided a personal guarantee, or other security, over their personal assets for the company’s loans, debts, or obligations; and/or
  3. Debts have been incurred by a company acting as trustee in situations where the trustee company (controlled by the director) has acted fraudulently or in breach of the terms of the trust; and/or
  4. The company owes certain tax debts to the Australian Taxation Office (e.g. PAYG) and the Australian Taxation Office has issued a Director Penalty Notice to the director; and/or
  5. The company has been involved in illegal “phoenix activity”, where assets have been intentionally transferred from an indebted company to a new company in order to avoid having to pay the indebted company’s creditors, tax, and/or employee entitlements.

Also, pursuant to the Corporations Act 2001 legislation, and other laws, including the common law, a director of a company owes duties to the company.  The most significant duties of a director are:

  • To act in good faith in the best interests of the company and for a proper purpose;
  • To exercise care and diligence;
  • To avoid conflicts between the interests of the company and the director’s personal interests. This includes disclosing material personal interests where a possible conflict may arise;
  • Not to improperly use inside information or position;
  • To prevent the company from trading while insolvent, namely, while the company is unable to pay its debts as and when its debts fall due.

There are serious civil and in some circumstances, criminal, consequences for a director in breach of his or her duties to a company.  Depending on the situation, the consequences may include:

  • Penalties in the form of fines, or imprisonment, or both; and/or
  • As noted above, personal liability for loss or damage suffered by the company or other affected parties; and/or
  • Disqualification by ASIC from managing (that is, being a director of) a company in the future.

If you would like more information, then please call us on (07) 4616 9898.

This publication has been carefully prepared, but it has been written in general terms and should be viewed as broad guidance only. It does not purport to be comprehensive or to render advice. No one should rely on the information contained in this publication without first obtaining professional advice relevant to their own specific situation.

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