Starting a Business
11. Limited Liability for Directors
Authors: Staff Legal Eagle
Firm / Chambers:
Last updated: 07 Jul 2015
- As a legal entity a company can sue and be sued in its own right.
- The director of a company can also be held personally responsible for offences under the Corporations Act 2001 (Cth) if they are negligent, fraudulent, reckless or fail to perform their duties.
- Personal guarantees or securities might also be required from a director when the company takes out a loan from a financial institution. Major creditors may also insist that directors provide a personal guarantee for the company's liabilities.
- There are a range of general legal requirements placed on the director of a company such as ensuring the company complies with the laws and regulations of the relevant industry.
- The most complicated obligations are often the duties that a director has towards shareholders.
- The Corporations Act 2001 (Cth) imposes various duties on directors designed to protect the interests of shareholders.
- This includes a duty to exercise powers and duties with care and reasonable diligence.
- As a director you must ensure you are informed of the financial position of your company and you have a duty to cease trading if your company is insolvent (cannot pay its debts).
- Directors must:
- act in good faith and for a proper purpose;
- not improperly use their position to gain a personal advantage;
- cause detriment to the company; or
- use information obtained through the position as director to gain an advantage.
- Directors found to be in breach of their duties may find themselves being held personally responsible for the debts of the company to creditors.
- This is especially likely if a director allows the company to continue trading after insolvency. For more information on insolvency please see our Bankruptcy topic.
- The important obligations placed on directors should not necessarily stop you from operating as a company. However these obligations must be considered when deciding how to structure the company. This is particularly important in a relatively small, family based proprietary company.
- It is essential that you understand your duties and potential liabilities as a company director before taking on the role.
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