Are you a director of a company which is having trading difficulties in trading and/or its operations generally?
You may be aware that as a director you have many duties under the Corporations Act, including:
- A duty of good faith and diligence
- A duty to prevent insolvent trading
- A duty to avoid conflicts of interest
- A duty to exercise powers for proper purposes
Breach of directors duties
You may not be aware that if you breach any of your director’s duties or obligations you can be subjected to severe penalties, including imprisonment, heavy fines and an award of damages. Further, you may also become personally liable for the company’s debts.
Claims against directors
We provide advice and assistance to directors subjected to a legal demand and subsequent Court action arising from an alleged breach of director duties. We can also assist companies, creditors and other entities to take legal action against directors for breach of duties.
Frequently, claims are made against directors for insolvent trading, together with breaches of other director’s duties, such as the making of preferential payments, either jointly and/or severally with the allegation of insolvent trading.
Insolvent trading is where a company continues to be run in such a way that it is unable to pay its debts as and when they fall due, thereby causing loss and damage to creditors and shareholders of the company.
Defences against claims
There are three main defences to any claim for breach of directors duties, namely:
- The business judgment rule, where the director involved may assert that their breach of duty arose after they had made an informed decision in good faith on behalf of the company which they genuinely and honestly believed was in the best interests of the company
- The reliance rule, where the director involved may assert that they had made an informed decision in good faith on behalf of the company which they genuinely and honestly believed was in the best interests of the company having relied on the advice or representation of another person (for example, an accountant or other professional adviser)
- The delegated power rule, where the director involved may assert that the breach arose from the acts or omissions of another person, for example a general manager or chief executive officer, who they honestly, genuinely and reasonably believed was reliable and competent in relation to the power delegated to them.
A personal or director’s guarantee is a legally binding agreement between a director of a company and a creditor, whereby the director agrees to be personally liable for a debt in circumstances where the company is unable to pay the debt.
Invariably the director also enters into an indemnity in favour of the creditor, which allows the creditor to demand monies due from the director of the company even if attempts to recover the debt from the company are not exhausted.
Personal guarantees are usually entered into by directors of companies to secure liabilities due by companies to landlords, banks, suppliers and other third parties.
Directors guarantees are powerful mechanisms in favour of third party creditors and individuals must obtain independent legal advice when entering into such an arrangement.
Many directors fail to realise that:
- The liability under a guarantee is usually a continuing one and as such continues after the director ceases to be a director of the company
- A company does not have to go into voluntary administration or liquidation for the guarantee to be called in.
What you must do
If you are a director of a company which you consider to be trading insolvently, or you are concerned that you may have breached any of your director’s duties, or received a notice alleging such a claim, you must call us now on 8354 2233 or make an enquiry.
Similarly, if you are a creditor or shareholder of a company and have suffered a loss which you consider is attributable to a breach by one or more directors of the company, please call us now on 8354 2233 or make an enquiry.
If you are a director or former director of a company faced with a guarantee claim, please contact us immediately. Guarantees are a highly technical area of law and it is possible to defend claims.