If you are the director of a company, it is important for you to be familiar with your duties and understand the legal obligations and the situations which could give rise to personal liability. As a director you should also be involved in the affairs and operations of the company and consult legal and professional advice as required.
Can I be held personally liable?
Generally directors are not held personally liable for their company’s actions since they are a separate legal entity, however, creditors of companies with limited assets and the Australian Securities and Investments Commission (“ASIC”) may hold directors personally liable if they have breached their duties under the Corporations Act 2001 (Cth). Circumstances in which this may occur include but are not limited to:
- insolvent trading;
- personal guarantees;
- breaching directors’ duties;
- taxation debts and superannuation contributions; and
- phoenix activity.
Can I be held liable for insolvent trading?
Companies are prohibited from trading whilst insolvent. If a director allows its company to trade whilst insolvent, they are in breach of civil and criminal provisions of the Corporations Act 2001 (Cth) and may be personally liable for debts incurred. However, certain defences may be available to protect directors against such liability.
Can I be held liable for personal guarantees?
A director may be liable if it has made a personal guarantee and has provided security over personal assets. A personal guarantee is an agreement between a director and a creditor where the director agrees to pay the debt of the company in the event that the company does not pay.
Can I be held liable for breaching my duties?
Where a director breaches its duties and the company suffers a loss, the director may be liable and civil and criminal penalties will apply.
What are my obligations to employees and contractors?
When engaging workers, businesses must take adequate steps to correctly identify whether a worker is a contractor or an employee and put the appropriate agreements and documents in place to protect the business against sham contracting.
It is also imperative that businesses review and update their employment and contractor agreements and engagements to ensure compliance with tax, superannuation and employee entitlement obligations under the Fair Work Act 2009 (Cth) (“FWA”) and other authorities.
What are my superannuation obligations for contractors?
Contractors may be considered employees for the purposes of superannuation. Where applicable, employers will need to make superannuation contributions for their contractors. The Australian Taxation Office (“ATO”) website provides a useful tool which helps businesses establish if and how a contractor’s superannuation and tax should be paid. The tool can be accessed here.
Can I be held liable for taxation debts and superannuation contributions?
Within 30 days of becoming a company director, director’s should check for any unpaid or unreported PAYG withholding or SGC liabilities to avoid incurring liabilities. How these liabilities will be viewed by potential buyers of a business must be considered. Staff who were involved in the failure to pay wages and entitlements correctly may also incur personal liability.
Criminal penalties for wage theft may be introduced
The Palaszczuk Government intends to criminalise wage theft in Queensland. If such legislation is passed, employers who commit wage theft (such as underpayment of wages or entitlements under the FWA may face harsh penalties such as imprisonment and large fines. For further information regarding wage theft click here. In any case, it is paramount that employers implement and regularly reassess practices which ensure that all employee entitlements, wages and tax obligations are paid correctly.
Can I be held liable for phoenix activity?
In the case of illegal phoenix activity, a director will be liable resulting in civil and criminal penalties and potentially a term of imprisonment. Illegal phoenix activity occurs when an existing company is deliberately liquidated to avoid paying outstanding debts, including taxes, creditors and employee entitlements and a new company is created to continue its business.
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The above information may have been been collected from relevant government or other sources and is subject to change. For the latest information regarding new or amended legislation, please refer to state and federal government websites.