Personal Liability for Company Directors
A company is an association incorporated under the Corporations Act 2001 (Cth) (the ‘Act’). The effect of incorporation gives the company a separate entity, distinct from its directors and shareholders. It can enter into contracts, sue and be sued in its individual right.
The Australian Investment and Securities Commission (ASIC) is the Government body authorised to administer the Act and may investigate and impose civil and criminal penalties for breaches under the Act.
As the company is a separate legal entity in its own right generally its directors are not personally liable for any actions the company may take. However, increasingly creditors of companies with limited assets and the ASIC are looking to pursue recovery from company directors who may have breached their duties.
In certain circumstances, directors can be held to be personally liable for losses of the company. Some of these circumstances include:
- Insolvent Trading;
- Personal Guarantees;
- Breaching directors duties;
- Taxation debts and superannuation contributions; and
- Phoenix activity.
Insolvent Trading
Under the Act a company must not trade whilst it is insolvent and the onus is on the directors of a company to ensure this does not happen. Directors who allow a company to trade whilst insolvent will be in breach of both civil and criminal provisions of the Act.
The protection afforded to directors and shareholders has been abused when companies have continued to trade despite warnings of potential insolvency. The
directors enter contracts, incur debts and then subsequently fold the company leaving a trail of creditors and financial suffering behind.
However, directors may not be liable if:
- They had reasonable grounds to expect the company was solvent;
- They did not participate in management due to illness or some other good reason; and
- They took all reasonable steps to prevent the company from incurring the debt.
Personal Guarantees
A personal guarantee is a separate agreement between a director and a creditor where the director of a company agrees to pay a debt of a company in the event that the company does not make payment.
This could include a director providing security over personal assets such as a home.
Breaching directors duties
Under the Act, directors have certain duties that must be complied with. Where a breach of any of these duties is committed and the company suffers a loss, directors can be personally liable.
In these circumstances, civil and criminal penalties under the Act will apply, including paying compensation to the company.
Taxation debts and superannuation contributions
Directors are personally responsible for companies complying with Pay As You Go (PAYG) withholding and Superannuation Guarantee Charge (SGC) obligations.
Where these obligations are not met by a company, a director can become personally liable for non-compliance and a penalty.
Phoenix Activity
This activity occurs where the directors of a company place it into administration or liquidation to avoid payment of creditors but continue the business under a new company name.
Not only can it result in civil and criminal penalties for directors, it can also result in a term of imprisonment.
Conclusion
Company directors hold a position of power and trust. The risk of personal is real but manageable and should not deter you from pursuing business and employment opportunities.
The best way to meet the obligations of being a director is to become familiar with your duties and to understand the legal obligations and the situations which could give rise to personal liability, be involved in the affairs and operations of the company and to obtain professional advice and assistance when needed.
If you or someone you know wants more information or needs help or advice, please contact us on (03) 9600 0162 or email info@lordlaw.com.au.
