Using a corporate entity to operate a business is by far the most popular business structure, and for good reason.
They are inexpensive to set up, you can trade in your own name and, crucially, a company has limited liability.
However if the owners are also company Directors, they should be aware of the extent to which a claimant can ‘pierce the corporate veil’ and personally expose the Director to liability for the conduct of the company.
Perhaps the best known of these risks is a Director’s personal liability for insolvent trading, which occurs when a company incurs a debt it cannot pay at a time when the director(s) knew or should have known the company was insolvent. The Corporations Act 2001 makes a Director personally responsible to pay creditors compensation equal to the amount of the debt.
Other areas for potential Director liability include personal guarantees, vicarious liability where the company has breached legislative provisions and employee entitlement claims.
A Director’s conduct can also give rise to criminal offences under the Corporations Act. For example, breach of good faith, misuse of position and misuse of information are criminal offences with a penalty of $340,000 and/or five years’ jail.
Directors can take steps to protect themselves by having a clear understanding of their role and responsibility as a company officer and a working knowledge of a Director’s statutory and common law duties. Best practice governance procedures will reduce the risk that the company will breach its obligations and the Directors will become vicariously liable.
Directors should also insist upon the company obtaining Directors’ and officers’ insurance, which will not protect against fraud, criminality or conduct in bad faith but does give substantial protection against many inadvertent breaches.
Finally, Directors should require written indemnification from loss by the company.