A company is a legal entity separate from its members. However, as much as this principle protects the directors’ personal assets from company liability, failure to uphold certain responsibilities may lead to a number of liabilities and challenges to the directors of the organization if they are not carried out diligently:

Misuse of company funds

The directors are personally responsible for the loss of money in the organization as a result of irregular allocation of cash to unauthorized business, authorizing payment to a shareholder that is not allowed by law or paying themselves irregular commissions. They may be asked to pay back the differences from their personal assets.

Payment of employee wages and other payments

If an employee sues the organization for wrongful dismissal and the organization does not have money to pay up, the directors may be called upon to cater for the shortfall. Moreover, they are also responsible for the payment of the employee salaries every month. They can be held accountable if the workers are not paid on time.

Civil liability

The board of directors may be sued in a civil court for actions out of their scope of duties as stated in the by-laws of the company. The directors can be sued for activities carried out by organizations that are outside of the law. A director could be personally responsible for activities he or she wrongly carried out in his or her capacity as the director. Other things that may lead to legal action against the directors include acts of negligence, oppression of some minor shareholders, and disputes about the firing of the workforce.

Failure to ensure legal compliance

There are set rules and conditions within which every organization should operate. If for some reason the organization fails to comply with the legal requirements, the directors may be held responsible for the company’s actions outside of the law. The directors should ensure that the organization has valid licenses to conduct business, meets the financial reporting regulations, and acquires the needed certificates required for industry-specific laws.

Misleading information and the consumer act

The consumer act offers protection to the consumers against the malpractices of the business entities. In Australia, the law replaced every other law that protected the consumers across the country. The law prohibits misleading or false representation or possible representation for the supply of services and goods. Companies found breaching this law are liable under the law. The directors may also be held personally liable under the law for the contravention of the consumer’s act. The law forbids indemnity from the company where the director is personally responsible. Both civil and criminal charges may be instituted depending on the circumstances in the case.

Failure to comply with safety and occupational health laws

The occupational health and safety laws define principles to ensure the health and the safety of the employees of an organization. The officers of the organization are obligated to ensure compliance with the law when the employee is going about their daily business in the organization. It is the directors’ personal responsibility to ensure that the workplace is in good condition. Failure to do so may lead to a lawsuit against the directors in conjunction to the organization as an entity. The law on safety allows the directors to handle the requirements of the law up to a point that is reasonably practical. The directors are supposed to maintain the plants, buy protective clothing and put in measures to mitigate the risk of injury in the production areas. Failure to comply with the law may lead to compensation to the injured party, a penalty, or a jail term.

Failure to comply with environmental laws

Environmental laws are put in place to prevent damage to the environment by companies. The laws differ from one state to the other. Each state has its own penalties set for directors whose companies fail to comply with the environmental rules. It is important that the directors go through various environmental laws in all the states that they conduct business. Some actions may be viewed as contravening the environment law in some states and not in others.

Preventing Personal Liability

To avoid the liabilities, the board of directors should:

Meet often and review the performance of the company
Refer to the bylaws and articles of incorporation when getting into new forms of business
Seek professional advice for matters such as account, legal compliance, and enacting different policies within the organization.
Keep informed of new regulations in the industry.

What do I do now?

Contact us if you would like legal advice on preventing personal liability. Our lawyers at You Legal will be happy to assist you in whatever way we can.

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

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