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Being a company director is both exciting and daunting. Being the ‘mind’ of the company comes with a lot of responsibility, so it can be overwhelming to keep track of exactly what your duties are as a company director.
We often hear from directors who are concerned about their potential personal liability for the debts of their company—wondering whether they could lose their house or other assets if the company gets into trouble.
But don’t worry. There are plenty of ways to manage these risks from the planning stages so you can focus on your company’s success.
But before we talk about liabilities of directors, it’s important to understand the main set of directors’ established duties.
What Duties Do I Owe As A Director?
Under the Corporations Act 2001, directors have the following duties:
- To act with due care and diligence
- To work in good faith
- Not to improperly use your position
- Not to improperly use information
While these are the main duties, other general duties include not trading while insolvent, or making proper disclosure of your interests.
Put simply, a director needs to have a good understanding of how their company operates so they can work in its best interests. If you find that you lack knowledge in a certain area, it then becomes your duty to investigate, seek advice and take steps accordingly. We’ve written about directors’ duties in more detail here.
Essentially, you need to be proactive in ensuring that the company doesn’t run into any trouble, otherwise you’ll be held liable.
So, how serious is liability?
What Is Limited Liability?
Liability is when you’re held responsible for a certain act. Usually, it involves consequences such as paying compensation or not being able to become a director in future. This is definitely the last thing you’d want, so directors are expected to consider liability from the outset.
Limited liability basically means that if the company ever runs into trouble and you’re held liable as the director, they can only take what you have put into the company. Why?
When you set up a company structure with limited liability, you’re basically setting up your business as a separate legal person. Your company will be capable of owing money and paying it back, just as a person would. This way, you’ll have no personal liability or losses.
Usually, a company director will not be personally liable for company debts or losses because they’re protected by limited liability. However, a company director can have personal liabilities in the following situations:
- If there are any unpaid tax obligations
- If personal guarantees have been given for the company when getting a loan (i.e. if the business cannot pay money back, the director has agreed to pay it back themselves)
- If the company was trading while insolvent
- If fraud has been committed
In addition to this, a breach of any directors’ duties can also bring personal liability. Since directors are held to a very high standard, it’s important to take extra care even when secured by limited liability. Director obligations can remain even after a company has been deregistered.
Can They Come After My House?
If you’re a company director and you’re protected by limited liability, then the general answer is no. Your house cannot be taken away to pay back any money under limited liability.
However, as we mentioned, directors can still be personally liable for breaching their duties as director. Unfortunately, you may be at risk of losing your house if you:
- Provided a personal guarantee for a loan stating that you will be responsible for paying back the money yourself
- Provided a form of security over your house (or other personal assets) to a bank
- Have any unpaid PAYG taxes and unpaid superannuation
- Are responsible for insolvent trading
ASIC provides more information about company directors’ liabilities here.
Can I Still Be Liable If I’ve Resigned As A Director?
Liabilities of directors may continue even after the company has stopped operating and has been deregistered by ASIC. If any breach were to occur after resignation, the circumstances will be looked at closely. Ordinarily, even if a director has resigned, they would still be liable for their actions when they were a director.
It’s worth noting that fiduciary duties survive even after resignation, so it’s always a good idea to be on the safe side and continue to act in the best interests of the company.
How Can I Reduce These Risks of Liability?
If you’re new to the world of company directors, you might be a bit overwhelmed by the concept of liability. But don’t stress—there are ways to manage these risks so you can also focus on helping your company thrive.
Insurance
With all the risks of liability, it’s a good idea to have Directors and Officers (D&O) Insurance. This protects directors from personal liability or financial losses if they had acted wrongfully or if the company were to run into trouble. This protection can be extended to other people in the company, such as employees or non-executive directors. This insurance would generally not cover intentional illegal conduct.
Deed of Indemnity
As we discussed, directors can be personally liable in some situations. However, it can be stressful for a director to pay these costs themselves—this is where a Deed of Indemnity might come in handy.
A Deed of Indemnity is an agreement between directors and the company. Generally, it sets out:
- The scope of protection (to what extent costs will be covered)
- D&O Insurance
- Access to documents
Put simply, a Deed of Indemnity covers any costs if a director breaches their duties, and protects the director from liability. However, each Deed of Indemnity varies depending on the company and the specific liabilities of the director.
Managing Your Finances
Directors have a lot to think about in terms of liability, but it’s vital that they stay on top of their financial obligations to prevent insolvent trading. Breaching this duty could result in personal liability, which is why it is worth considering from the outset.
While it is common practice to rely on accountants and banks to take care of your company’s finances, you’re still responsible for ensuring everything runs smoothly. Even if your company is doing well financially, it’s important to invest yourself into financial matters. In some cases, this may require you investigating certain areas that you’re unsure about, but this is all part of minimising the risk of liability.
A big part of managing finance is record-keeping. It’s the director’s responsibility to keep track of the company’s financial position and performance, so it’s encouraged that you keep records such as:
- Financial statements (invoices, receipts)
- Deeds
- Minutes of meetings
Next Steps
Being a company director is an exciting step in the business world, but the level of legal responsibility it carries can be daunting. Luckily, Sprintlaw has a team of experienced lawyers who can help you manage these risks from the outset.
You can reach us at team@sprintlaw.com.au or contact us on 1800 730 617 for a free chat about your business journey.
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