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31 May 2016

A director's personal liability is not limited to the Corporations Act


3 min

Awareness must extend beyond a company's financial matters.

Most people are aware that a director can be held personally liable for their actions, or the actions of their company, pursuant to various provisions under the Corporations Act 2001.

For example, under the Corporations Act a director can be held personally liable for:

  • insolvent trading

  • breach of director's duties.

However, director's personal liability can extend to:

  • various Workplace Health and Safety Laws. Here, individuals who are concerned in the management of a corporation, which includes its directors, managers and officers, are personally liable for prosecution for the corporation's breaches of work safety obligations. These can be brought against its officer without even bringing proceedings against the company.

  • the Fair Work Act 2009, as an accessory to the company, for a company's underpayment of correct wages to its employees. To be liable though, the director must be "knowingly concerned" in the company's underpayment.

  • franchising arrangements. This is because the Franchising Code of Conduct (Code) is mandatory under the Competition and Consumer Act 2010 (CCA) and places obligations on parties to a franchising agreement. Specifically, franchisors must disclose specific facts and follow set procedures e.g. involvement in certain litigation. If breached, and depending on the circumstances, the directors of the franchisor can be held personally liable when knowingly concerned in misleading and deceptive conduct as that is a breach of the CCA. Notably, a licensing or distribution agreement could be considered a franchise agreement, even if the agreement states it is not a franchising agreement.

  • the CCA. It contains or joins other legislation that can impose personal liability on a director (or other officers) of a company.

  • the Environmental Protection (Chain of Responsibility) Amendment Bill 2016. This legislation, passed in Queensland on 27 April 2016, means an environmental protection order can be issued on a party that has some relationship to a company in financial difficulty, which requires the recipient to pay the costs of an environmental clean-up. There needs to be a ‘relevant connection’ to the company operating the site to use the chain of responsibility provisions. That means to be liable, a person must have or been capable of benefitting financially, from carrying out a relevant activity or in a position that influenced the company’s conduct regarding its environmental obligations. The first such order under this Act has required the former Chief Executive (and major shareholder) in the now liquidated Linc Energy Limited to put forward a bank guarantee for $5 million against potential environmental clean-up works.

These examples show that directors are at risk under many legislative provisions—not just the Corporations Act—that can impose a personal liability and potential criminal liability. Critically, directors must be fully informed about a company's affairs (both financial and otherwise) and actively supervise the management of the company's business. Giving passive responsibility of management to others won't always, if ever, protect directors from potential personal liability.

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