Discussing the responsibilities of directors and shareholders in proprietary limited companies.
A company is a separate legal person which can own assets (including a business and real property) and incur debts in its own name.
A private company is owned by its shareholders in their respective shareholding proportions, for example, a shareholder with a 50% shareholding owns 50% of the company. Shareholders are not personally liable for the debts of the company. The liability of a shareholder is limited only to any unpaid amount of their shares.
The directors of the company control the company and its decision making. Unlike shareholders, directors of a company can be personally liable for debts of the company in (albeit in limited circumstances). Directors also have an obligation to comply with various statutory obligations and can be exposed to liability for failing to do so.
Shareholders are not liable for the debts of the company. The liability of a shareholder is limited only to any unpaid amount of that shareholder’s shares. For example, if a shareholder is recorded with ASIC as owning 10 shares at $1.00 per share, then that shareholder can be called upon by the company to pay that $10 if it previously was not paid. A company cannot require a shareholder to contribute towards a company debt, or inject more capital into the company, even if the company were struggling financially. Likewise, a shareholder cannot be held personally liable in their capacity as shareholder if it eventuated that the company was guilty of some form of misconduct.
Directors are at risk of incurring personal liability in certain circumstances.
It is important to understand that a company is its own legal person and has its own obligations and liabilities that are distinct from a director’s own personal obligations and liabilities. Under most circumstances, a director will not be personally liable for validly incurred debts of the company.
However, there are some circumstances where a director may be personally liable for the liabilities of a company. Generally, the law looks to hold directors personally accountable when they have failed to comply with their duties as a director in some way. We have summarised some examples below.
Directors have a duty to ensure that their company does not trade while it is insolvent i.e. allowing the company to trade whilst suspecting, or an ordinary person in that situation would have reasonably suspected, that the company was unable to repay its debts.
Under these circumstances, a director may be in breach of both civil and criminal provisions and be personally liable for the debts that the company has incurred.
Tax and Superannuation Debt
Directors may be personally liable if the company has failed to meet various tax and superannuation obligations. This includes personal liability for unpaid superannuation, GST, PAYG, Luxury Car Tax and Wine Equalisation Tax.
It is common for directors to provide personal guarantees on behalf of the company in commercial transactions. For example, if a company failed to repay a loan as agreed and the director provided a personal guarantee under the loan agreement, then the director may be personally liable to repay the loan (plus interests and costs). This may mean that the lender under the agreement could sue the director personally and any assets owned by the director in their personal name could be on the line, which may include the family home.
To mitigate this risk and protect their personal assets, company directors should consider obtaining legal advice around asset protection and structuring.
Illegal phoenix activity
Directors have an obligation not to participate in illegal phoenix activity. ‘Phoenixing’ is when a company is wound up deliberately to avoid paying its debts and a new company is created to continue the same business as before. A director may be personally liable for the company’s debts in this situation, along with criminal charges that carry large fines and up to 15 years imprisonment.
Directors have an obligation to comply with the various directors duties as set out in the Corporations Act 2001 (Cth). Failure to do so may mean that a director is guilty of a criminal offence and/or a civil offence, is personally liable for the liabilities of the company and is prohibited from managing a company in the future.
Essentially, directors are responsible for the affairs of a company. This is why it is critically important that directors ensure they are fully informed and up to date on company matters. Amongst other things, directors must:
• act in good faith and in the best interests of the company;
• act with care, skill and diligence;
• exercise powers for a proper purpose (e.g. not for improper personal gain or to cause detriment to the company);
• avoid conflicts of interest;
• take a diligent and proper interest in the financials of the company and ensure that the company can meet its debts; and
• maintain proper company records and comply with governance requirements.
Being a director of a company is an important role that comes with legally enforceable obligations and responsibilities. As a consequence, you should not agree to become a company director unless you are prepared to take a diligent interest in closely monitoring the activities of the company. Otherwise, there is risk of suffering personal liability and other consequences.
This article in no way constitutes legal advice. It is general in nature and is the opinion of the author only. You should seek legal advice tailored to your individual circumstances before acting on anything related to this article.
This podcast in no way constitutes legal advice. It is general in nature and is the opinion of the author only. You should seek legal advice tailored to your individual circumstances before acting on anything related to this podcast.
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