As a company director, do you fully understand the obligations which relate to your duties?
Breaches of director’s duties can lead to personal liability including civil and criminal penalties and liability for damages. Serious offences can lead to imprisonment.
Most people would be aware of the fiduciary duties for company directors under the Corporations Act, including a duty to act honestly, to not improperly use inside information, to avoid conflict of interest, to not abuse corporate opportunity and the duty of care and diligence.
However, many directors are not as familiar with their responsibilities to third parties and the risk of vicarious liability – when they become personally liable for breaches made by the company.
Take for example the duty not to engage in insolvent trading. If a director fails to prevent a company from trading while insolvent or from trading in a way that will make it insolvent, the director may become personally liable for the company’s debts and be ordered to pay compensation to the company or its creditors. You would be in breach of your duty if you were aware or had reasonable grounds to suspect that the company would be unable to pay debts – the only defence would be to demonstrate that illness or incapacitation prevented you from being so aware.
Vicarious liability applies, for example, in work health and safety (WHS) obligations. The company must meet the minimum standards of health and safety for their employees according to the WHS legislation in that state or territory. In some states, where a company violates one of the WHS Acts, directors will also be in breach, unless they are able to satisfy a court that the director could not influence relevant conduct of the company or the director used all due diligence to prevent the contravention by the company. Breaches of the relevant WHS Act attract large fines.
Directors may also be prosecuted personally for tax offences committed by the company. While the ATO’s policy is to prosecute the company rather than the individuals who manage it, director’s will be personally prosecuted where the company has insufficient assets, where the directors were deliberately using the company to defeat the operation of tax laws or where the company has already been prosecuted for a tax offence and it is apparent that the prosecution has not deterred the company from re-offending.
9 STEPS TO PROTECT YOURSELF IF YOU ARE A DIRECTOR
Directors should try to take the following steps in order to limit their potential exposure to personal liability:
1. Examine past financial statements of the company;
2. Attend board meetings on a regular basis;
3. Ensure that the company maintains accounting records in accordance with its legal obligations;
4. Ensure that the management of a company verifies information given by officers and employees of the company;
5. Obtain professional advice in order to make informed decisions about matters which affect the company;
6. Obtain proper advice in respect of the primary legislation that applies to the activities of the company and the obligations that are imposed by the legislation on both the company and you as a director;
7. Ensure that proper procedures exist and are followed in order to minimise the risk of the company breaching any of its liabilities to minimise the risk that you become vicariously liable;
8. Require the company to obtain Directors’ and Officers’ Insurance to provide some protection to you. Due to the general law rule prohibiting individuals from insuring themselves against criminal allegations, the coverage of D&O Insurance is not unlimited and will not cover certain conduct of the director (for example, breaches of duties owed to the company and conduct in bad faith); and
9. Require the company to indemnify you for any loss that you suffer in connection with acting as a director for the company. Such an indemnity may be set out in the constitution of the company or in a separate Deed of Indemnity.
For more information or advice on directors liabilities please contact Edney Ryan Legal.