As of October 2022, directors can be held personally liable for decisions made in their role, and it is essential that you understand all of your obligations to avoid significant penalties.
Appointment as a director
Being appointed as a director in Australia is open to anyone aged 18 or older who is not disqualified from holding such a position in an Australian company. Residency in Australia is not a mandatory requirement for directors, but at least one director must be a resident of Australia. To assume the role of a director, one must sign a written consent notice and provide the company with specific personal information.
Director Identification Number (DIN)
As of the end of 2021, the DIN system was implemented, mandating that any current or prospective director of an Australian entity must apply for a Director Identification Number (DIN). The purpose of the application is to verify the identity of the director and assign them a unique 15-digit number, which remains the same regardless of changes in directorship. Failure to apply for a DIN on time is a criminal offense under Australian law, and directors are personally responsible for applying. Penalties for non-compliance can reach up to $1.1 million.
The deadline for application depends on the date of the director’s first appointment. For appointments made on or before October 31, 2021, the deadline for application is November 30, 2022. For appointments made between November 1, 2021, and April 4, 2022, the deadline is within 28 days of appointment. For appointments made on or after April 5, 2022, the application must be submitted prior to appointment.
The application process can be time-consuming, especially for non-resident directors, and may take several weeks. It is recommended that directors begin the process early. Additional information can be found on the ABRS website, or by contacting us at legal@blackstonelaw.com.au or calling us at 1300 070 770 for further guidance.
Resignation as a director
In the absence of any extenuating circumstances, a director is permitted to resign from their directorship by providing written notice to the company at any time.
Fiduciary duties owed to a company
Upon assuming the role of a director, various fiduciary duties are owed to the company. If these duties are violated, the director may be held personally liable, leading to potential civil and criminal penalties, as well as liability for damages.
Duty to act honestly
As a director, it is imperative to act in good faith and in the best interests of the company, while also pursuing a proper purpose. This duty goes beyond basic honesty and requires directors to exercise independent judgment based on relevant facts, materials, and other perspectives when evaluating the company’s best interests.
It should be noted that breaching this duty, particularly in cases of fraud, dishonesty, or recklessness, can lead to criminal consequences. If you require assistance in this matter, please do not hesitate to contact us, by emailing us at legal@blackstonelaw.com.au or calling us at 1300 070 770.
Duty not to improperly use insider information or position
It is essential for a director to avoid misusing their position or any information obtained through it to achieve personal gain or harm the company. Improper use of a director’s position can occur regardless of the director’s intent or desired outcome.
Furthermore, if a director utilizes information gained through their position for their personal benefit rather than that of the company, it is likely to constitute a breach of this duty.
Duty to avoid a conflict of interest and to disclose material personal interests
Directors are obligated to disclose any personal interests that may be relevant to the company’s affairs. In the event of a conflict of interest, directors must notify the board as soon as they become aware of the situation.
For directors of proprietary companies, notice of the conflict may not be necessary if the other directors are already aware of the nature and extent of the conflict.
The procedures to follow when dealing with conflicts of interest vary depending on the circumstances and typically require specialized advice. Depending on the situation, it may be appropriate for a director to disclose the conflict and refrain from voting on the issue, or the director may need to resign from their position.
Duty not to abuse a corporate opportunity
In addition to the obligation to disclose any material personal interests, directors are obligated to refrain from exploiting a corporate opportunity for personal benefit at the company’s expense.
If the company has properly evaluated and rejected the opportunity, only then may a director pursue it personally, provided they have satisfied all necessary disclosure requirements.
Duty of care and diligence
The duty to exercise care and diligence requires a director to act with the same level of care and diligence that a reasonable person in a similar position would exercise. When assessing whether a director has met this objective standard, factors such as the size of the company, the director’s experience, position, and responsibilities are taken into account.
A director may not be held liable for breaching the duty of care and diligence if they acted in good faith, for a proper purpose, believed the decision was in the best interests of the company after making all necessary inquiries, and had no personal interest in the matter at hand.
Duties owed to third parties
As soon as a director is appointed, and for the duration of their appointment, they bear the following obligations to external parties which, if contravened, could result in the director being held personally responsible.
Duty not to engage in insolvent trading
The duty to prevent a company from trading while insolvent or in a way that may make it insolvent is imposed on every director. If this duty is breached, the director may become personally liable for the company’s debts and may have to compensate the company or its creditors.
A director will be considered to have breached this duty if they were aware, or had reasonable grounds to suspect, that the company is or may become unable to pay its debts as they become due, at the time the company incurred the debt.
The director’s awareness of the company’s insolvency will be judged based on whether a reasonable person in the same position would have been aware. A director may only avoid liability if they can demonstrate that there were reasonable grounds to expect that the company was solvent and would remain so, unless they were ill or incapacitated.
Duty to keep proper accounts and records
It is the duty of each director to ensure that the company prepares both a financial report and a directors’ report at the end of each financial year. While small proprietary companies may be exempt from lodging all the information required of larger companies, it is still the responsibility of each director to familiarize themselves with the accounting and recording obligations. Seeking specialist accounting advice may be necessary in fulfilling this duty.
Vicarious liability
In certain situations, a director may be held personally liable for a company’s violation of the law. This type of liability is known as “vicarious liability,” and it applies to directors who were serving on the board at the time of the breach. The following are some examples of the types of Australian laws that may result in personal liability for directors if the company they serve on breaches them.
Competition and Consumer Act – The Competition and Consumer Act 2010 (Cth) (CCA) has a broad impact on the daily operations of companies and governs various areas, including competition policy, consumer protection, and product liability. In certain situations, if a company breaches a provision of the CCA, its directors may face personal liability. The penalties for such breaches can be significant, ranging from large fines to imprisonment, depending on the circumstances.
Occupational health and safety laws – Work health and safety (WHS) legislation in Australia imposes certain obligations on companies with employees in each state and territory. It is a requirement that companies ensure the health, safety, and welfare of their employees, contractors, and other persons at work. Breaches of the relevant WHS Acts may result in significant fines.
In some states, where a company has violated a WHS Act, the directors may also be deemed to have breached the Act, unless they can demonstrate to the court that the director could not influence the relevant conduct of the company or that the director used all due diligence to prevent the company’s contravention.
To protect themselves, directors should exercise due diligence in fulfilling their roles, allocate obligations and responsibilities accordingly, and ensure that appropriate people are attending to WHS matters through reporting, auditing, and accountability. Additionally, directors should have an understanding of WHS and the information required to fulfill these obligations.
- Environmental protection laws – Environmental protection laws are in place in all Australian States and Territories to prevent harm to the environment. Violations of these laws, such as illegal waste disposal or harmful substance leakage, may result in substantial fines for a company, exceeding AUD 1 million. If a company is found guilty of an environmental offence, its directors may also face liability for aiding, abetting, attempting, or conspiring to commit such an offence, which may lead to significant fines and imprisonment.
To mitigate the risk of penalty, it is essential for companies to have an effective environmental compliance program in place, which the directors must supervise and implement. The program and its implementation may serve as evidence in court to reduce the penalty imposed on the company and/or its directors in the event of a successful prosecution.
- Taxation – Personal liability for tax offences committed by the company may be imposed on directors. A defence to this liability is available if the director can demonstrate that they did not in any way knowingly participate in or facilitate the act or omission of the company. The Australian Taxation Office (ATO) usually prosecutes the company rather than the individuals managing it. However, there are exceptions to this, such as when the company lacks assets, or where directors deliberately misuse the company to circumvent tax laws.
Additionally, if a company fails to remit certain tax instalment deductions to the ATO, directors may be held personally liable for the unpaid amount. When a penalty notice is issued, directors have 14 days to respond to avoid personal liability by having the company pay the owed amount, entering into a payment agreement, appointing a voluntary administrator, or appointing a liquidator. Failing to act within this period will lead to automatic imposition of a penalty on each director, which equals the company’s outstanding tax liability.
- Superannuation – In Australia, it is mandatory for all employers, including companies, to provide a minimum level of superannuation every quarter to their employees. Failure to do so may result in the employer being liable to pay the superannuation guarantee charge. Directors of companies that have employed staff may also be held personally liable for the amount equal to the superannuation guarantee charge that the company owes.
Useful recommendations for Directors
Measures to reduce liability
Directors can take the following actions to reduce their potential personal liability:
- Seek expert guidance on the relevant laws that apply to the company’s operations and the responsibilities imposed by those laws on both the company and its directors.
- Ensure that effective protocols are in place and are adhered to, to minimize the likelihood of the company violating any of its obligations and thus lowering the risk of directors incurring vicarious liability.
Directors can take the following steps to protect themselves from potential personal liability:
- Require the company to obtain Directors’ and Officers’ Insurance (D&O Insurance) to provide some protection. However, it should be noted that D&O Insurance may not cover all types of conduct, such as breaches of duties owed to the company or conduct in bad faith.
- Require the company to indemnify the director for any loss suffered in connection with acting as a director. This indemnity can be set out in the company’s constitution or in a separate Deed of Indemnity and Access.
For further discussion on these matters, please contact us at 1300 070 770 or legal@blackstonelaw.com.au.
