Many businesses employ a company as the vehicle to operate their business. This is usually done to minimise the exposure of the director(s) personally for the debts incurred in running the business and for tax reasons. However, there are circumstances in which directors may not be protected behind this “corporate veil”.
The directors of a company have duties to the company under both:
- the common law; and
- the Corporations Act 2001 (Cth), sometimes called statutory duties.
A breach of these duties has the potential to render a director liable for the debts of the company.
What are directors’ duties?
Common law duties fall into 2 broad categories:
- to act in good faith (sometimes called fiduciary duties); and
- to exercise skill and care (requiring a director not to act negligently).
Statutory duties are similar in nature to their common duties. Broadly, a director must:
- exercise their power and discharge their duties with care and diligence (s180(1));
- exercise their power and discharge their duties in good faith and for a proper purpose (s181).
- not improperly use their position (s182); and
- not improperly use company information (s183).
Who do directors owe these duties to?
The traditional view is that directors owe these duties to the company. The duties are meant to ensure that directors act in the company’s best interests. They are not to obtain a benefit for themselves or anyone else at the company’s expense.
However, recent decisions by the Courts have expanded the scope of directors’ duties to include a duty to a company’s creditors. In circumstances where a company is:
- near insolvency;
- of doubtful solvency; or
- at real risk of insolvency because the company is financially unstable or in financial difficulties;
the Courts have found that the directors owe a duty to take into account the interests of creditors.
What happens when a director breaches a duty owed to creditors?
If a company is eventually wound up for insolvency, the liquidator may turn to the director(s) personally to pay the debts owed by the company.
If you are being pursued by a liquidator or creditor for debts owed by your company or you are just concerned about understanding your obligations, you should seek legal advice immediately to avoid further action against you.
You should also seek legal advice immediately if you have been served with any Court document as strict timelines can apply once Court documents are served. Failure to meet those timelines can result in a judgment against you for the full amount claimed by the plaintiff.
If you are involved in a dispute involving a company, contact us by completing the enquiry form below to speak to one of our experienced lawyers.