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What are the Consequences of Breaching Directors’ Duties?

June 24, 2021   Ishani GangopadhyayPhilip Evangelou

As a company director, there are many duties that must be upheld. If you breach your duties as a director, you may:

  • Be guilty of committing a criminal offence with penalties being a maximum fine of $200,000, imprisonment for up to five years or both
  • Have contravened a civil provision with the penalty being a maximum fine of $200,000
  • Be personally liable to compensate the company at hand for any damage or loss suffered 
  • Be prohibited from managing a company

Who is Eligible to be a Director?

According to the Corporations Act 2001, a Director must be at least 18 years old and provide written consent to holding the position and taking on its roles and responsibilities. This written consent must be kept by the company and ASIC should also be notified of the director’s appointment.

ASIC also has the ability to prohibit certain individuals from being a director. For example, if you are experiencing undischarged bankruptcy or have entered into a personal insolvency agreement governed by the Bankruptcy Act 1966 and failed to comply with this agreement, such a prohibition would occur. 

What are the Duties of a Director?

Considering the severe consequences of breaching duties as a director, it is important to be aware of all such duties and obligations. These can be found in law (namely the Corporations Act 2001), the constitution of your company and/or the shareholder’s agreement of your company. 

Under the Corporations Act 2001 in particular, duties of a director include:

  • Exercising powers with care and diligence which may involve:
    • Making judgements in good faith
    • Not having material personal interest in a matter that is the subject of a judgement
    • Being appropriately informed on the subject matter pertaining to judgements
    • Rationally believing that the judgements being made are in the best interest of the company 
  • Not dishonestly using position either intentionally or recklessly to gain direct or indirect advantages for oneself, others or to the detriment of the company
    • Further, it is not a defence to say that you used the position dishonestly in a way that directly or indirectly advantaged the company 
  • Preventing the company from trading if it is insolvent
    • A company is considered insolvent if it is unable to pay its debts when they are due and this can be determined via assessing cash flows and the company’s financial position as a whole

More on Incurring Liability for Company Finances

Whilst any losses suffered by a company as a result of a director’s breach of duties may become the personal liability of the director, keep in mind that there are other circumstances where directors may become personally liable for certain company finances. 

For example, the debts of a company may fall under a director’s personal liability if the company becomes insolvent. This can be attributed to the fundamental duty of a company director to ensure that the company is not trading when insolvent (as outlined in the above section). 

Additionally, any outstanding company tax obligations may also fall under such liability due to the ATO’s Director Penalty Regime. 

If You Think There Has Been a Breach

If you believe there has been a breach of your duties as a director, it is imperative that you seek legal and financial advice as soon as you can as the consequences can be quite severe. 

Key Takeaways

For a breach of directors’ duties, the consequences can be quite serious and as such, it is important to be aware of these duties and obligations, ensure compliance to them and seek  legal and financial advice and assistance if a breach is suspected.  

About Ishani Gangopadhyay

Ishani GangopadhyayIshani works with OpenLegal as a paralegal whilst completing her law degree at the University of NSW. She is also Director of Content at the non-profit organisation Echo, and has worked within the business and marketing teams of The Meridian Magazine.

About Philip Evangelou

phillipPhil is a director at OpenLegal. He has over 16 years experience working in private practice and in-house counsel in Sydney and London, giving him expertise in employment law, IP, finance, leases, dispute resolution, insurance and contracts.