The concept of a "separate legal entity" evolved during the Industrial Revolution.

The idea to create "separate legal entities" evolved as a means of shielding directors from burdens that might otherwise prevent their entrepreneurial endeavours, particularly during the industrial revolution. From as early as the 1800s the judiciary has been struggling with the concept, describing it as “a bubble[1]”, “a myth and a fiction[2]” and even a “sham or bogus[3]”. Nonetheless, the concept prevailed and arguably gained strength as we progressed into the information age. More recently, however, the theory of legal responsibility has begun to take hold, and governments and courts are making their position very clear: companies don’t make decisions – people do! This position is reflected across many pieces of legislation, from tax and company law to environmental law, corruption and bribery and employer responsibilities. There are many circumstances in which you will be held personally liable for the decisions you, aka, your “company” make. The ability to hide behind the veil of the separate legal entity is no more.

[1] Lennard’s Carrying Co Ltd v Asiatic Petroleum Co Ltd [1915] AC 705 at p. 715

[2] Roderip v Salmon [1895] 9 Ch. 323

[3] R v Grubb [1915] 2 KB 683 at p. 691

Let’s take a look by breaking down each of the corresponding pieces of legislation:

1. Corporations Act

Diligence and Good Faith

Some of the provisions in the Corporations Act, such as those that require a standard of conduct impose both corporate fines and civil liabilities for failure to meet those standards. Generally, where a director has acted in good faith and in the best interests of their company, they won’t be held personally liable for the failings of the company. If, however, their actions fall significantly short of those standards so as to be classified as willful negligence or misconduct, the Australian Securities and Investment Commission (ASIC) has the power to impose civil penalties, including personal fines on directors.

Insolvent Trading

The Corporations Act contains an express personal liability provision for directors who continue to trade while their company is insolvent. Not trading whilst insolvent may seem quite straightforward, but legal insolvency is complex, and the provisions relating to personal liability even more so. Recent amendments to the Corporations Act provide some relief in the new Safe Harbour provisions, but in circumstances where the claw back provisions are triggered, personal liability can extend to related entities of the directors, including partners and children.

Insider Trading

Insider trading is one of the more infamous provisions in the Corporations Act, and we've all heard the high profile cases, this is in part, although prosecutions are uncommon, consequences include fines of up to $450,000 and 10 years imprisonment.

2. Competition and Consumer Act

False or misleading statements

The Competition and Consumer Act is another piece of legislation that contains several offences that carry personal liability for directors, such as making false or misleading statements. This includes statements as to the prices of goods or services, country of origin, intentionally ambiguous statements and outright dishonest behaviour.

Cartel Conduct

Cartel conduct includes making an agreement with a competitor to fix prices or inflate prices, rig tender or bidding processes, restricting market availability of a product or otherwise engaging in anti-competitor behaviour. Consequences include fines of up to $420,000 per offence and up to 10 years in jail.

3. Environmental Protection Legislation

Each Australian state and territory has enacted its own environmental protection laws that place liability on corporations and their decision-makers for the consequences of their decisions. Serious offences such as unlawful disposal of waste can incur personal fines up of up to $290,000 and 7 years in jail per offence.

4. Employee Relations

Occupational Health and Safety

Much of the legislation that touches the rights of employees will enforce strict compliance, and none more so than the Occupational Health and Safety Legislation. Directors and officers are required to actively prevent health and safety incidents in the workplace. Offences range from corporate and personal fines and imprisonment in cases of wilful negligence or recklessness.

Superannuation Guarantee

If you employ staff you will be personally liable for the minimum superannuation amount payable under the Superannuation Guarantee.

5. Tax Obligations

The Australian Taxation Legislation triggers personal liability for Directors who are responsible for meeting PAYG obligations. If your company fails to pay PAYG or SGC debt, it will be given a 21 day notice period in which to pay, failing which the ATO may pursue directors personally for the amount outstanding.

So what does this all mean for company directors?

It is no longer possible to hide behind the corporate veil. Trends in corporate governance lean increasingly towards corporate responsibility, with lawmakers, judiciary and even the broader community demanding that directors be held responsible for the decisions they make. In our next blog, we will explore some of the ways in which directors can protect themselves and their assets against personal liability - click here. In the meantime, if you have any questions about your obligations as a director - call or email us for a no-obligation chat.

* This blog is for general guidance only. Legal advice should be sought before taking action in relation to any specific issues.

Director Liability Part 1: Companies Don’t Make Decisions - People Do.