Company directors have many responsibilities when carrying out their duties.
Generally, company directors and officers are not personally liable for a company’s debts. Certain circumstances however can arise where directors may find themselves facing legal or other regulatory action exposing them to personal liability. Generally, the more complex the role, the greater the risk.
In addition to potential civil proceedings being brought against a company and personally against its directors, regulatory bodies such as the Australian Securities and Investment Commission (ASIC) have the power to personally fine directors for certain breaches of company law.
The threat of personal liability could cause directors to become overly risk averse which may jeopardise potential opportunities for the company’s growth and development. It is therefore appropriate that companies might wish to protect their officers against such liability and that company directors should insist on protection.
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 own 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, generally its directors are not personally liable for the company’s actions. However, increasingly, creditors of companies that have limited assets and ASIC are pursuing recovery personally from company directors who may have breached their duties under the Act.
In certain circumstances, directors can be held personally liable for losses of the company. Some of these circumstances include:
In recent times the term ‘corporate governance’, and the increasingly popular ‘good corporate governance’, appear to be regular topics of discussion both in the media and the general population.
These terms are routinely used when considering the actions of a wide range of companies from very small local companies through to global giants such as McDonalds and Nike.
However, it is not always clear what these terms actually mean or what steps a company or its board of directors need to take to ensure they are able to demonstrate that they are exercising good corporate governance.
Did you know that company directors may potentially become personally liable for unremitted Pay As You Go (PAYG) deductions and Superannuation Guarantee Charges (SGCs)?
The Australian Taxation Office (ATO) has significant powers to recover a company’s unpaid liabilities personally through its directors and may issue a Director Penalty Notice (DPN).
This article focuses on the DPN regime and the options directors have in the event that they receive a DPN.
Long gone are the days when accepting a directorship meant occasionally turning up to a company’s annual general meeting, accepting a director’s fee and turning a blind eye to how a company was actually being run.
In recent years, with increasing regularity and at times severity, Australian Courts have made it clear that directors have significant personal responsibilities and duties and may be held to be personally accountable and liable for breaches of those duties.
Steps you can a take to mitigate against personal liability
From the outset it is essential that a director fully understands and complies with the scope of any duties that come with the directorship in order to be able to take appropriate steps and to act in such a way that personal liability is limited.
It is also important that if you are a director you take steps to maximise the protection the company of which you are a director is able to provide to you.
Finally it is also recommended that a director understands any cover provided under a directors’ and officers’ insurance policy especially any exclusions or limitations that may be in place.
During difficult economic conditions it is important that all directors revisit their duties as directors and are aware of how the board should deal with the situation where a company is in financial difficulty and may be insolvent.
What is insolvency?
A company is deemed to be insolvent when it cannot pay its debts as and when they fall due.
The test sounds simple however its application involves a range of accounting and legal issues. When determining a company’s solvency a Court will consider the overall financial circumstances as a matter of commercial reality. Particular emphasis will be placed on a cash flow test, however, there are also a range of balance sheet factors including the ability to realise the value of assets and raise further funds, be it equity or debt.