Are you exposed to liability as a director?

[ can a director become liable for breaches by the company ]
by Cameron Hancock Published

Recently, I wrote an article (What duties do you have as a director of a company) detailing each of the duties that directors have under the Corporations Act 2001 (Cth). Since then, I have had a number of clients ask, particularly clients looking to start a new business, can a director personally become liable for breaches by the company. The answer is yes in certain circumstances.

A term that you would be familiar with is “vicarious liability” which is the liability that a director of a company may be subject to if a company breaches certain laws. The following is a sample of some of the instances where directors of Australian companies may personally become liable if the company they are a director of breaches certain laws.

Selection of Legislation imposing liability of Directors

Workplace Health and Safety

Workplace health and safety ('WHS') imposes obligations on companies to ensure the health, safety and welfare at work of their employees, contractors and other persons. Breaches of the relevant WHS obligations can attract large fines.

Directors have a duty of due diligence to ensure that the person conducting the business complies with WHS obligations. Where there are serious breaches, then a director can be imprisoned.

Directors can protect themselves by:

  • having a well documented WHS policy that all employees and contractors are fully aware of and have access to;
  • having an informed basis for believing that WHS is being properly attended to by the engaged parties; and
  • showing and exercising due diligence in fulfilling their roles.

Sexual Harassment

In recent years, companies have faced tremendous scrutiny in how they deal with sexual harassment. It has been well documented that companies have failed to use adequate systems and processes to assure victims that their claims are being taking seriously and to address sexual harassment in the work place generally.

That said, recent court cases have identified that laws may be available against directors in relation to failing to adequately address sexual harassment in the workplace. Specifically, if a Director / Employer has not provided a safe work place and tolerated sexual harassment, it may well be argued that that company’s workplace policies and statements are misleading or deceptive.

Superannuation

An employer will be liable to pay a superannuation guarantee charge, if they fail to provide the minimum amount of superannuation.

Directors of companies that employ staff may be personally liable for an amount equal to the superannuation guarantee charge that the company owes.

Anti-Competitive Conduct

Conduct prohibited under the Competition and Consumer Act 2010 (Cth) (‘CCA’) includes exclusive dealing and anti-competitive arrangements and misuse of market power.

Depending on the circumstances, where a company has contravened a provision of the CCA, directors of that company may be found to be personally liable. Most directors should be aware that penalties for breaches of the CCA may be millions of dollars and/or jail, depending on the circumstances.

Taxation

Where a corporation commits a taxation offence, a person who takes part in the management of the corporation may be deemed to have committed the taxation offence (i.e. directors may be prosecuted personally for tax offences committed by the company). A potential defence to liability is if the director can prove that he or she did not aid, abet, counsel or procure the act or omission of the company and was not in any way knowingly involved in or a party to that act or omission.

Taxation (Director penalty notices)

When an amount remains outstanding, the Australian Taxation Office may issue a director penalty notice. When a penalty notice is issued, directors have the following option to avoid personal liability. Directors can:

  • have the company pay the amount owing;
  • enter into a payment agreement with respect to the amount owing;
  • put the company into Voluntary Administration; or
  • appoint a liquidator to the company.

Each director of the company will automatically incur a penalty equal to the company’s outstanding tax liability if none of the above steps are taken within the 14 day notice period.

Environmental Law

In many State and Territories of Australia, environmental laws make directors personally liable for breaches by their companies.

What you can do to limit your potential liability

You can limit your potential liability by undertaking the following steps:

  • obtain proper advice in respect of the legislation that applies to the activities of the company; and
  • ensure that proper procedures exist and are followed at every level of the company. This will minimise the risk of the company breaching any of its liabilities and subsequently minimise the risk of directors becoming vicariously liable.

A director may also want to consider the following:

  • request the company to obtain Directors’ and Officers’ Insurance (D&O Insurance) to provide some protection to the directors. It is important to note that the coverage of D&O Insurance is not unlimited and will not cover certain conduct of the director (i.e. breaches of duties owed to the company and conduct in bad faith); and
  • request the company to enter into a Deed of Indemnity and Access to indemnify the director for any loss suffered by the director in connection with acting as a director for the company.

If you are thinking of starting a company or have recently done so and would like to discuss your liabilities as a director, then feel free to contact the Legal team to discuss.

General Advice Disclaimer

Information provided on this website is general in nature and does not constitute financial or legal advice. Every effort has been made to ensure that the information provided is accurate, but information may become outdated as legislation and new government announcements are made. Individuals must not rely on this information to make a financial, investment or legal decision as it does not take into account their personal circumstance. Before making any decision, we recommend you consult a licensed adviser or legal practitioner to take into account your particular objectives, circumstances and individual needs.

Cameron Hancock
read more by Cameron Hancock

Cameron is an experienced commercial lawyer with significant expertise in commercial property law. Cameron has a committed and commercial approach to transactions which has seen him secure the best possible commercial outcomes for his clients.

Cameron provides advisory, structuring and transaction services to a number of industries with specific focus on the agribusiness and real estate.

Cameron's clients are often involved in restructures, buying and selling businesses and commercial land.

Past projects Cameron has assisted with include: sales and purchases of leasehold and freehold shopping centres, large rural properties, hotels and motels and manufacturing enterprises from initial due diligence and contract negotiation stage to successful completion; agribusiness transactions; and Property developments, retail and commercial leasing.

Director of businessDEPOT Legal Pty Ltd 

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