This is a common question that arises for directors, whether it be directors of a proprietary limited company or public company: can I be personally liable as a director?
There are various situations whereby you are protected from being sued in your personal capacity as a director. However, you cannot solely rely on these methods in the event you or your company are sued.
When am I protected from being personally liable as a director if my company is sued?
A common phrase you may have heard is 'the corporate veil.' The corporate veil is an artificial 'shield' which protects directors from being personally liable if a company is sued or if you are sued as a director of that company.
This is because a company is its own distinct corporate legal entity which is capable of suing and being sued. Therefore, joining directors to most lawsuits is not permitted and, generally speaking, as a director, you will be protected from court proceedings.
Regardless of whether you actually are protected from a lawsuit by the corporate veil, if you are sued as a director of a company or if your company is sued, we recommend you should immediately seek legal advice.
How do companies and individuals get around the corporate veil?
Another phrase you may have heard is 'piercing the corporate veil.' This is where individuals, companies and Government organisations can sue you personally and target your personally owned assets as a result of your conduct as a director.
Examples where you will be personally liable as a director include:
- Engaging in 'insolvent trading' under the Corporations Act 2001 (Cth): Insolvent trading occurs when the company no longer has enough funds to pay its liabilities, as and when they fall due, and yet the company still continues to trade. This is when a director may become personally liable;
- Breaching certain Occupational Health and Safety Laws and Regulations: In certain circumstances, directors may be personally liable for fines and sanctions for breaching these regulations despite the company being the legal entity to engage in the conduct;
- Breaching taxation laws: A prohibited practice known as 'phoenixing a company' can result in a director being personally liable for unpaid taxes. Phoenixing occurs when a company incurs substantial debts (including unpaid tax) only for the director(s) to move the company's assets into a new company structure. At the same time, the directors commence winding up of the existing company to avoid unpaid tax and debts. If you are caught phoenixing, you face substantial financial penalties; and
- Non-payment of employee entitlements: Directors are also personally liable for unpaid employee superannuation guarantee amounts and unpaid PAYG instalments.
How can Sharrock Pitman Legal help me if I become a director or face a lawsuit?
You cannot always rely on the corporate veil to protect you. However, there are strategies available to guard against the risk of significant financial distress if you are sued as a director.
If you are a director, you should immediately seek legal advice from an experienced commercial lawyer concerning your potential exposure to liability. For more information regarding directors' duties other than financial liability read our previous article here.
ASIC also provides information regarding directors' duties and directors' liabilities. For more information regarding directors' liabilities, view the ASIC website here.
At Sharrock Pitman Legal, our Accredited Commercial Law Specialists can assist you and provide timely advice about what you should do as a director, how to reduce your risk of any personal liability, and how to protect your personal assets from attack. Please feel free to call Mitchell Zadow on (03) 8561 3318 if you have any queries, or fill in the form below.
The information contained in this article is intended to be of a general nature only and should not be relied upon as legal advice. Any legal matters should be discussed specifically with one of our lawyers.
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Mitchell is the Managing Principal of our law practice.
He is an Accredited Specialist in Commercial Law (accredited by the Law Institute of Victoria). He also deals with areas of Employment Law, Wills & Estate Planning and Probate. For further information, contact Mitchell on his direct line (03) 8561 3318.