Liabilities of directors

Company directors have important legal duties under the Corporations Act. If directors breach these duties, they can face significant liabilities.

Key points about directors' liabilities:

• Directors can be personally liable for company debts and penalties if they breach their duties
  
• Common areas of liability include insolvent trading, breaches of environmental law, and failures in work health and safety
• Directors can also face civil penalties and disqualification in cases of repeated breaches
• There are some protections available for directors acting reasonably and honestly
  

What laws impose liabilities on directors?

The primary laws imposing duties and potential liabilities on company directors in Australia are the Corporations Act 2001 (Cth) and the Australian Securities and Investments Commission Act 2001 (Cth).

Under these Acts, directors have statutory duties including to:

• Act with care and diligence
• Act in good faith in the company's best interests
• Not improperly use their position or information
• Prevent insolvent trading by the company

If directors breach these duties, they can face civil penalties and compensation claims. There are also many other laws that impose duties on companies and directors across areas like environment, consumer protection and work health and safety.

What are the most common areas of liability for directors?

The three most common personal liability risks for company directors are:

1. Insolvent trading - Directors can be ordered to pay compensation if they allow an insolvent company to incur further debts. This aims to prevent directors from 'trading out' of difficulty in ways that prejudice creditors.

2. Breaches of environmental law - Directors can be personally liable for penalties and clean-up costs if their company breaches environmental protection laws.

3. Failures in work health and safety (WHS) - Directors and officers can be imprisoned or fined if a failure in their company's WHS systems leads to death, serious injuries or illnesses.

What penalties can directors face?

If directors breach their duties either negligently or recklessly, the strongest penalties they face are:

• Civil penalties of up to $200,000 per contravention
• Compensation orders to pay those who lose money from their breaches
• Being disqualified from managing a company for up to 20 years

There are also unlimited criminal fines and up to 5 years imprisonment for some of the most serious breaches by directors involving dishonesty or intent to deceive or defraud.

Is any protection available for directors?

Some laws do provide relief for directors who act reasonably or rely on professional advice about company affairs. But directors need to take an active role overseeing their company's compliance systems to access these protections.

The AICD provides directors with training and resources aimed at strengthening governance capabilities and reducing personal liability risks. With the right skills and care, directors can improve compliance in their organisation and avoid attracting personal liability.