It is unsurprising that where a director or indeed a company member violates some aspect of corporate law, they will be held responsible, perhaps even where they did not realise a wrong had been committed. Companies, on the other hand, are separate entities from the individuals behind them. While the doctrine of corporate personhood has the benefit of limiting company liability, it also follows that companies can be held liable for both civil and criminal wrongs. It is therefore important to understand not only how a director and a member can be held liable for regulatory breaches, but how a company can be punished for breaching the law as well.
A. Liability of Directors
Where a company fails despite competent management, the debts of the company will not normally be transferred to directors. However, where some conduct has occurred in violation of the director’s duties, they will be held liable for the damage incurred and may be at risk of other civil or criminal penalties. One of the most egregious breaches a director can engage in is trading while insolvent. This is a serious violation of the Corporations Act and will see the director personally liable for losses suffered by the company over that period. ASIC can also commence proceedings to have an offender barred from directing another company for a period of time.
Directors also owe stringent fiduciary duties to the companies they represent. Breach of these duties gives rise to causes of action against the director personally. For example, courts can rule that profits made by a director owing to a misuse of their authority are held on constructive trust for the company. Such serious breaches of the fiduciary relationship can give rise to criminal sanction including fines, imprisonment and bans on taking up company directorship in future.
B. Liability of Members
Where limited companies are concerned, members are insulated from the company’s debts and are not held personally liable for any losses accrued by directors. However, there are two circumstances that can act as exceptions to this rule. Firstly, some directors may hold shares in the company, making them member-directors. Such persons will still remain liable in their capacity as directors for any mismanagement or breaches of duty that may have occurred. Secondly, if a member has only partly paid off their shares, the company or its administrator may call upon them to pay the balance. This can be done even if the shares have already been revoked for lack of payment. If the company is not limited, members can also be called upon to contribute to the costs of winding up.
C. Company Liability
The company as a separate entity can also be held liable for both civil and criminal wrongs committed by the individuals that comprise it. Civil company liability generally arises by vicariously attributing the conduct of employees and agents to the company. Where the impugned conduct occurs within the scope of the offender’s employment, their actions can be imputed to the company and civil liability arises. Criminal company liability can arise in this way, but also where the company has failed to meet an absolute or strict duty that is non-delegable or where a company representative has offended in a way that is treated as an act of the company. A peculiarity of criminal action against companies is that for some offences they must be adjudged to have a guilty mind. This is resolved by substituting the minds of individuals with the authority to bind or represent the company, therefore imputing criminal liability.
Directors, members and the company itself can all face liability for failing to follow proper corporate regulations. Directors possess perhaps the most onerous requirements, whereas members have very limited liability. The company itself can be just as liable as its directors, agents and employees if their conduct can be imputed to the organisation. It is therefore important to be certain that your conduct complies with relevant regulations.
General outlines are no substitute for legal advice which you should seek if you require further information or feel you may be in breach. This article was authorised by Warwick Heeson.