Director Liability Disputes
Being a director of a company is a very important role. Directors owe duties to a company and the other directors and the Corporations Act imposes obligations on directors that may have potentially adverse personal consequences for them such as the obligation not to allow the company to do business and incur debts while it is insolvent.
The Corporations Act imposes obligations on directors to make business decisions for the company in good faith and for a proper purpose and which they believe are in the best interests of the company.
Directors must act in the best interest of the company and not to prefer the director’s personal interests to the company’s interest.
Directors may find themselves involved in disputes with other directors or shareholders of the company because of their conduct and decisions while acting as directors. In some circumstances, a director of a company that is acting as a trustee may become personally responsible for liabilities incurred by the company if the company breaches the terms of the trust, or the trustee company acts outside the scope of its powers as trustee.
Another risk to directors arises from illegal Phoenix activity. This may be more likely to occur in times of economic downturn. Phoenix activity refers to the creation of a new company to continue the business of an existing company that has been wound up or deregistered to avoid paying outstanding debts including debts owed to the Australian Taxation Office, employee entitlements or other creditors.
Directors’ liability is a serious matter. In some instances, failure of a director to perform his or her duties may lead to a criminal offence or contravention of civil penalty provisions under the Corporations Act and personal liability to compensate the company or third parties for any loss they suffer.
There are specific problems that arise for one director or two director companies that operate small businesses. These problems often arise because a director does not understand that the company is a separate legal person from the director. There is a risk that a director does not distinguish between the company’s finances and the director’s personal finances which causes the director or to breach duties owed to the company.
If you face or are concerned about a liability arising from your conduct as director of a company, it is important to obtain legal advice as early as possible to protect your personal assets and to avoid serious adverse consequences. This is one area in which delay can quickly make the problem much worse.
