Where does the buck stop for directors? Are you on top of director liability?
Earlier this year Australia was shocked with the news of George Calombaris underpaying his hard-working restaurant staff.
While it can be difficult navigating the mine field of employment award conditions, many were left wondering whether he knew, if he would be held accountable, and what would happen if they were in a similar position.
In this article, Bennett & Philp’s business advisory expert Nadia Sabaini sheds light on the legal obligations of a company director and the extent to which a director can be personally liable for the actions of their company.
Trading while insolvent and company debts
Directors are not usually liable for the debts of their company, unless they have given a personal guarantee. That said, if a company continues to trade after becoming insolvent, directors become personally liable for debts incurred by the company while insolvent. Additionally, the Australian Tax Office can claim against directors personally for any unpaid tax liabilities of the company in certain cases. This is because all directors are under a positive duty not to permit the company to trade while insolvent and to ensure the company meets its tax obligations when due.
There are two other situations where a director can also be personally liable for the debts of a company:
- Debts incurred by companies acting as trustees, if the company cannot be indemnified from the assets of the trust because of a breach of trust by the company
- Illegal phoenix activities, where companies are wound up and restarted to avoid outstanding debts, tax or employee liabilities.
Breach of directors’ duties
As briefly outlined above, directors have certain duties and obligations which are set out in the Corporations Act 2001, the body of legislation governing companies in Australia.
The primary duties of directors include preventing insolvent trading, as well as:
- Exercising the director’s powers and duties with the care and diligence that a reasonable person would have
- Exercising the director’s powers and duties in good faith, in the best interests of the company and for a proper purpose
- Not using the director’s position improperly to gain an advantage for themselves or someone else, or to cause detriment to the company
- Not using company information improperly to gain an advantage for themselves or someone else, or to cause detriment to the company
- Avoiding (and disclosing) conflicts of interest
Breaches of directors’ duties can attract civil penalties and prosecution. The maximum civil penalty for directors was increased five-fold in 2018 to $1.05m per person or three times the amount of the benefit derived from the contravention.
Anyone affected by a breach of a directors’ duties can file a law suit, including a third-party claimant or the company and fellow directors.
A director remains liable to keep a watchful eye on the company as part of their director’s duties and a lack of interest or supervision is no excuse. Being a silent director is no legal defence.
Statutory fines and penalties
The Corporations Act is not the only governing regulation that can impose civil and criminal penalties on directors. Directors can also face the consequences of breaching laws such as those regulating workplace health and safety, environmental and trade practices.
Although personal liability could depend on the level of a director’s involvement in a matter, and it is possible to delegate a director’s powers in compliance with the Corporations Act, it is important to know that vicarious liability can arise for anyone in control of a company in breach, particular for a sole director.
When you are personally involved
Following on from the last points, directors sometimes forget that the corporate veil cannot be used to cover up personal negligence. If a director commits a criminal offence (for example fraud) or a civil wrongdoing (for example bullying or harassment) or becomes involved in a criminal offence or civil wrongdoing, then it is of course the director, not the company, that is committing the act. It is certainly possible for directors to be sued individually because of their personal involvement in a matter.
6 key recommendations
At Bennett & Philp, our recommendation to company directors is to:
- Keep informed, even if you are not directly engaged in the day to day running of the company
- Delegate where appropriate, verifying the delegate’s credentials and asking for reports
- Maintain a good level of record keeping, ensuring all advices, instructions, reports and minutes are in writing
- Ensure bills are paid on time and accounts are lodged when due
- Step in when you need to in board matters, even if it’s not within your ordinary sphere of responsibility
- If something goes wrong, seek advice promptly.
Bennett & Philp is a leading provider of solutions-focused legal services to large corporates, small and medium enterprises and individuals.
