What Happens If There Is A Breach Of A Director’s Duty?

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It’s no secret that directors hold a position of power over a company’s operations. Because of this, they are subject to certain duties and obligations that help to promote good governance and ensure they act in the company’s best interests.

If you are a director of a company, or thinking about becoming one, you’ll need to know and understand what these duties are so you can make sure you act in accordance with them. Breaching your duties as a director can have some very serious consequences for you in both your professional and personal capacity.

Who Is A Director?

Working out if you are a director is based on the definition found in section 9 of the Corporations Act. This includes directors, de facto directors and shadow directors.

Director: Someone who has been validly appointed as a director or an alternate director
De facto director: Someone who carries out the same roles that a director would, even though they have not been validly appointed as one
Shadow director: Someone whose instructions and / or wishes are followed by validly appointed directors of the company, even though they themselves have not been validly appointed as one

It’s important to note you don’t need to be validly appointed as a director to be bound by the director’s duties. The case of Deputy Commissioner of Taxation v Austin found that the question of whether someone is a director involves a look at what roles they carry out in real life and, specifically, if they exercise the “actual top level of management functions”.

At the end of the day, if you are exercising the same powers and discharging the same functions that a director would, you will need to accept the responsibilities and obligations that come with being a director.

What Are The Director’s Duties?

The Corporations Act 2001 provides for four primary director’s duties:

To act with due care and diligence
To work in good faith in the best interests of the company and for a proper purpose
Not to improperly use the position as director
Not to improperly use information

Additionally, there are a few other general duties you will need to be aware of as a director. These include:

Ensuring the company doesn’t trade while insolvent
Taking reasonable steps to ensure the company keeps financial records
Properly disclosing your personal interests
Lodging certain information with ASIC
Properly identifying the company when you are trading under it
Staying up to date with the company’s decision making
Upholding tax obligations (this will be explored further)

Dive deeper into the nitty gritty of director’s duties here.

Has There Been A Breach Of A Director’s Duty?

Working out if there has been a breach of a director’s duty depends on the specific situation and should be considered on a case-by-case basis.

Ask yourself whether the actions you or another company director have taken are authorised by:

the company constitution
the company’s members in a general meeting
the company’s board of directors

If proper authorisation has been given, it will be unlikely that a breach of a director’s duty has taken place.

Example
The members of Company XYZ passed a resolution allowing Tom, a director of Company XYZ to take out a loan on behalf of the company.
If Tom takes out a loan in accordance with the resolution, it is unlikely that he will have breached his director’s duties.

What Happens If There Has Been A Breach Of A Director’s Duties?

Breaching your director’s duties can have very serious consequences and often varies according to what duty has been breached and what has subsequently happened because of the breach.

These can include:

Personal liability (being held personally liable for civil penalties, compensation, debts and financial losses, and tax obligations)
Criminal conviction
Disqualification as a director
Commercial repercussions

Personal Liability

Civil Penalties

If you breach one of the director’s duties provided for by the Corporations Act, you could be held personally liable for civil penalties. This means you may be required to pay a fine.

The maximum civil penalty an individual can be held liable for is contained in section 1317G of the Corporations Act. As of April 2021, the maximum amount is the greater of $1.1 million, or three times the benefit obtained and detriment avoided (this amount is decided by the courts).

In addition to this, the Australian Securities and Investments Commission (ASIC) can pursue directors in their personal capacity if the company has committed a serious breach of its ordinary obligations under the Corporations Act or other relevant legislation.

This position was recently affirmed by the Federal Court in ASIC v Vocation Limited (in liq). By allowing the company to commit such a serious breach, it was found that the directors failed to act in accordance with their duty to act with due care and diligence.

Compensation

The Corporations Act also grants courts the power to make compensation orders against directors who have breached their duties. This means that if you contravene your director’s duties, you could be held personally liable to pay compensation and damages not only to the company, but also anyone who suffers loss as a consequence of the breach.

Unlike civil penalties, there is no limit to the amount of compensation a court can order you to pay. Rather, compensation is calculated according to the loss and damage suffered.

Company Debts And Financial Losses

In most cases, a company will be responsible for its own debts. However, there are some situations in which you can be held personally liable for repaying the company’s debts. These include:

If you have breached a director’s duty and, as a result of the breach, the company has suffered a loss
If the company becomes insolvent
If you act as a guarantor for the company
Illegal phoenix activity (that is, if you register a new company to take over a business that had previously become insolvent)

Tax Obligations

As a director of a company, you also bear the responsibility for ensuring the company meets its tax obligations in relation to:

PAYG: you will need to collect pay as you go (PAY) withholding amounts from employees
GST payments: as of 1 April 2020, this includes the luxury car tax (LCT) and wine equalisation tax (WET)
Super guarantee: you will need to pay a minimum of 9.5% of an employee’s ordinary time earnings toward their super at least four times a year

If your company fails to comply with its tax obligations and doesn’t remit the requisite tax amounts to the Australian Taxation Office (ATO), the ATO can issue a director penalty notice (DPN).

There are two types of DPNs:

non-lockdown DPNs
lockdown DPNs

A non-lockdown DPN will be issued for unpaid amounts that have been reported to the ATO within 3 months of the due date. This is usually done by including the amounts on the company’s Business Activity Statement. If you receive a non-lockdown DPN, you will have 21 days to:

Pay the unremitted amounts to the ATO
Appoint a voluntary administrator
Appoint a liquidator to have the company wound up

In contrast, a lockdown DPN is issued by the ATO in cases where unpaid amounts were not reported or disclosed on the company’s Business Activity Statement. If you receive a lockdown DPN, you won’t be able to escape personal liability and you will need to pay the unremitted amounts in full within 21 days.

Importantly, if you join a company as a director, once you have held the position for 30 days, you can be held personally liable for any unremitted tax amounts that were due prior to your appointment as director.

Criminal Conviction

In extreme cases, if you have seriously breached your duty to act in good faith or the duties not to improperly use information or the position of director, you could face criminal charges and even imprisonment for up to 15 years. Breaches resulting in criminal conviction often involve an element of dishonesty or recklessness, including a director making false or misleading disclosures or engaging in dishonest conduct.

Disqualification

Both the courts and ASIC have the power to disqualify you from managing companies for long periods of time if you have breached your directors duties.

Commercial Ramifications

Though not a legal consequence, it’s also important to be aware of the implications breaching a director’s duty has for the company itself.

As you know, a company’s reputation is often one of its most valuable assets. If a company director breaches their duty, it will likely tarnish that reputation and the company will often be subjected to much greater scrutiny from the public – meaning actual and potential investors and regulators alike.

I Think There Has Been A Breach. What Should I Do?

One of the best things to do if you think there has been a breach of a director’s duty is to obtain independent financial and legal advice as soon as you become aware of it. It is essential to do this as soon as possible so you can minimise the consequences of the breach efficiently, as well as mitigate your own personal liability.

Moving forward, it will be important that you implement strong policies and processes to ensure compliance with the law, the company constitution, and other operational shareholder agreements.

Speak With A Lawyer

Understanding your responsibilities and obligations as a director of a company can be overwhelming, as there are many areas of the company you will need to be across. If you would like more information or help with getting on top of your legal obligations as a director, get in touch! We have a team of friendly expert lawyers who are ready to help. For a free, no obligations chat, email team@sprintlaw.com.au or call 1800 730 617.

Kayleigh Yap

Kayleigh is a graduate in Arts and Law from the University of New South Wales. With an interest in human rights and intellectual property law, she has experience working in communications and marketing for small businesses and not-for-profits.

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