A common question we are asked by business owners is:
When am I personally liable for the debts of my business?
The answer to this question depends on the structure of your business.
A sole trader will always be personally liable for the debts of their business.
However, if your business is structured using, for example, a company or a unit trust, you will generally only be personally liable for debts your business incurs if:
- you sign a personal guarantee;
- you breach a workplace law;
- you don’t pay your business’ tax; or
- you breach your directors’ duties.
In this article, we map out directors’ duties, including what they are and what you are up for if you breach them. If you are a business owner or are starting a new venture, it is essential to understand your duties (and potential liability) as a director.
Directors’ Duties
As a director, you owe duties to your company under both the Corporations Act 2001 (Cth) (Corporations Act), and at common law.
The main directors’ duties are as follows:
- duty to act for a proper purpose;
- duty to act in good faith;
- duty to act with care and diligence;
- duty to avoid conflicts of interest;
- duty to prevent insolvent trading; and
- administrative duties.
A company’s constitution and shareholders’ agreement may also impose additional duties on directors – so make sure you check these too!
If you breach any of your directors’ duties (for example, by allowing your company to continue to trade when it cannot pay its debts when they are due) you may be personally liable for loss suffered by your company, as well as loss suffered by others.
Defending and Insuring
Defending a claim as a director can involve demonstrating that a business judgment has been made in good faith, for a proper purpose, and that the director rationally believed the decision to be in the best interests of the company.
A director can also defend a claim where they are able to show that they relied on advice or information provided by an expert(s). This will require a director to demonstrate that it was reasonable for them to rely on the advice, that the expert relied on is competent and suitably qualified to provide the advice, and that the director properly reviewed the advice.
Whilst section 199A of the Corporations Act prevents directors from indemnifying themselves against a breach of their directors’ duties, companies are able to take out directors’ and officers’ insurance to help protect against personal liability (and associated financial loss). The insurance can, however, be expensive and difficult to qualify for.
The Corporations Act again comes into play here – section 199B prohibits companies from paying for premiums which would indemnify directors for wilful breaches of their duties.
Consequences of Breaching Directors’ Duties
ASIC can also take action against company directors under section 180(1) of the Corporations Act, to hold them accountable for any failure to prevent a breach. This is known as the “Stepping Stone Liability”, which poses a considerable risk for directors. ASIC is not afraid to take action (even beyond the Corporations Act), making it all the more important for directors to understand their statutory obligations.
Penalties for breaching section 180(1) of the Corporations Act can be up to 5000 penalty units – or $1,565,000. Non-monetary penalties may also be imposed, which include a Court making a relinquishment or disqualification order.
Protect Yourself and Contact Us
If you would like more information regarding compliance with directors’ duties, your personal liability as a business owner or managing your debts, contact our experienced business lawyers for a confidential discussion on (03) 9481 2000 or info@tauruslawyers.com.au