General Guide to Director’s Liability in Australia
When a director breaches a duty in Australia, the consequences depend on whether it is a general law duty or a statutory duty that is breached, and also what sort of remedy is being sought. A breach of a statutory duty may be so serious that a civil or even criminal penalty is imposed on the director.
1. Business Judgement Rule Defence
The narrow business judgment rule defence applies not only to the obligation to act cautiously, but also to the satisfaction of similar obligation in common law and in equity. The business judgment rule relates to a decision making, not only for an unintentional inaction. Therefore, the directors will need to make or avoid from making a decision. If they refrain from making a decision, that must be a considered action.
The fact that all the criteria for the defence are not satisfied does not mean that the director is taken to have breached the duty of care — it is still necessary for a breach to be proven.
The narrow business judgment rule defence does not apply to any other statute or common law duties (in particular, it does not apply to the duty to avoid insolvency transactions, such as fiduciary duty and non-performance obligations).
However, because of the narrow operation of the rule, it is impossible to fully defend unless the only matter to be considered is one involving a business judgment, where the contention is that the board acted without the requisite skill, care and/or diligence.
2. Conflicts of Interest
Directors are not allowed for their own interests to conflict with the company. In general, this duty does not assume any significance unless the company has lost money (or the director gained it) as a result of the conflict of interest.
A director should take responsibility and in charge of any profit derived or to indemnify it against any loss arising from the action. Moreover, any contract entered into is voidable at the option of the company.
3. Superannuation Obligations
All Australian employers must provide a minimum level of superannuation (each quarter) for every employee. The employers are liable to pay the superannuation guarantee charge if the employer failed to provide the minimum requirement to their employees.
Directors of the company who employ staff may take an individual liability to the employee for an amount equal to the superannuation guarantee charge that the company owes.
4. Company Tax Obligations
Directors must ensure that if the company has made Pay As You Go (PAYG) deductions (e.g. from employees’ salary), the company should remit the instalments to the Commissioner within the specified time or makes alternative arrangements. In default, each director becomes personally liable for a penalty equal to the unpaid amount.
5. Intellectual Property Infringements
Directors who have a right to control over the company may be liable for the authorisation of the infringement. In relation to the infringement of patents, they may have a chance to take the personal responsibility as well.
6. Accessorial Liability for Breaches of Competition and Consumer Act
Where a company has contravened a provision of the Competition and Consumer Act 2010, directors of that company may be found personally liable. This is particularly common in cases where the company is accused of engaging in misleading or deceptive conduct in breach of the Australian Consumer Law contained in Sch 2 of the Competition and Consumer Act 2010 (CTH) and the directors are accessories to the conduct.
7. Occupational Health and Safety
The various OHS Acts in the various states impose varying levels of personal liability on directors and senior managers for OHS breaches of the company. The exact wording and nature of directors’/managers’ liability varies somewhat between states.
In certain states, where a company violates one of the state based occupational health and safety acts, directors may also be deemed to be in breach of these state-based occupational health and safety acts, 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.
Severe penalties (including gaol terms) may be imposed where directors or managers are found guilty of OHS offences.
8. Environmental Protection
All Australian Territories and States have enacted environmental protection legislation. Serious offences can carry penalties over 1 million AUD. When an offence against state-based environmental protection legislation is proved against the company, the directors of the company risk being held liable for the ancillary offence of aiding, abetting, attempting or conspiring to commit such an offence which carries a maximum penalty of AUD290,000 and/or 7 years imprisonment.
9. Director of Corporate Trustees
A director may be personally liable for corporate debts incurred under certain situations, e.g. where a debt is incurred without reasonable grounds to expect that a company will be able to repay it or where a person has or may have been guilty of fraud, negligence, breach of trust, breach of duty or other misconduct.
A personal liability on trustee company directors when the trustee company incurs a liability while acting, or purporting to act, as trustee if the trustee company: (1) has not, and cannot, discharge the liability or that part of it, and (2) the trustee has no right to receive compensations for the liabilities in the Trust Assets solely for the company’s breach of the Law or for a company acting within the purview of the Trustee; or if the Trust Clause rejects or limits the Company’s liability. The person is liable both individually and jointly with the corporation and anyone else who is liable under this subsection. However, the person will not be liable under this subsection merely because there are insufficient trust assets out of which the corporation can be indemnified.
10. Prevent Insolvent Trading
If the company is being wound up and the company director breached his duty to prevent the company from trading while insolvent under Section 588G, the liquidator may sue the director for compensation.
Although most claims of compensation will be proposed by liquidator, individual creditors may also sue a director for compensation. However, a creditor cannot sue if the liquidator has already sued the director.