If you are a director or officer, the law and the government require you to exercise your duties and obligations with due diligence. In particular, the government and the law require you to perform the following:
There are many offences under Corporations Act 2001, other laws, and government agencies that a director or officer might commit. However, these are the most common types of offences, according to the Australian Securities and Investments Commission (ASIC):
A company is a separate legal entity (juridical person) from those who manage it. In most cases, the company’s liabilities will remain with the company, if it is managed responsibly.
However, all rules have exemptions. There are some circumstances when a director or directors become personally liable for the organisation’s debts, particularly if they breached the law. In fact, an officer or director’s liability is not limited to financial matters; they can also be the subject of regulatory action.
So, what circumstances may result in the director’s personal liability? Here’s a list of events, negligence, and offences where an officer or director may face criminal prosecution or shoulder personal liability:
If the firm becomes insolvent, the debts incurred by the company could be shouldered by the officer or director
This can happen only if the firm participates in trades even when it is insolvent. The reason why directors can be held liable for such debts goes back to one of the fundamental duties of a director, which is to make sure that a company does not trade whilst it is insolvent.
If the company’s losses are due to a breach of the directors’ duty, such losses will be the directors’ personal liability
All the director’s duties are listed in the Corporations Act of 2001. If the directors acted against the law — be in breach of the civil or criminal provisions of the stated law – then they may have to compensate the company for such loss.
It is also worthy of note that directors’ duties may continue even if the company has ceased its activity or has been deregistered.
If a director acts as a guarantor or provides security for the company using their personal assets, they may become liable for the debt
It is a commercial practice that a bank, trade creditor, or any creditor would want to secure the payment of the debts; thus, they ask for a guarantor for such credit. This is a personal guarantee for the company’s liability and a form of security over assets to ensure the performance of the frm’s obligation.
Since personal guarantee is provided by the director, he or she may become personally liable for such debts, which he or she guaranteed to pay.
If the officer or director acts as a trustee, all debts incurred by the company could also be their debts
When companies that act as trustees breach the terms of trust, such breach may not be of the firm alone; It is also the director’s responsibility.
If the director did an illegal phoenix activity, it is considered a crime
An illegal phoenix activity happens when an indebted company avoids paying its creditors, its taxes, or employees’ entitlements by transferring its assets to a new company.
Such an act, which is considered a serious crime, may result in the company’s directors and officers being imprisoned.
Although most of a director or officer’s duties are listed in the Corporations Law 2001, there are also some regulations that are administered by other agencies. Some of these are: the ATO’s Director Penalty Regime, Pay As You Go (PAYG), and Superannuation Guarantee Charge (SGC). The breach of such laws may result in liability equal to these pecuniary obligations.
If you are a director or officer who failed to perform your duties and obligations, you might face the following penalties and sanctions:
If you want to know more about the responsibilities of an officer or director or if you need legal advice, feel free to contact us.
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