Navigating the array of laws that impact on every facet of your company’s business can be a minefield. This two part series has a focus on some of the statutes that can impact upon you and your company, and ways to limit your personal exposure to liability as a director.
Navigating the array of laws that impact on every facet of your company’s business can be a minefield. As a director of a company, you owe duties to the company under the Corporations Act 2001 (Cth) and at law, such as the duty to act in the best interests of the company and the duty to act with care and diligence. A breach of those duties will render you personally liable to the company for any loss suffered by the company.
However, you can also be personally liable as a director under a variety of statutes, including if you are ‘involved’ in a contravention by your company under those laws. This is commonly known as ‘accessorial’ liability and whilst the reach of accessorial liability varies, it generally covers instances where you have been ‘involved’ in a contravention by:
- aiding, abetting, counselling or procuring the contravention;
- inducing the contravention, including by threats, promises or otherwise;
- being in any way, including by act or omission, directly or indirectly, knowingly concerned in or a party to the contravention; or
- conspiring with others to effect the contravention.
In this two part series, we consider some of the statutes that can impact upon you and your company, and ways to limit your personal exposure to liability as a director. In Part 1, we specifically look at the statutory liability of directors under taxation laws, company laws, workplace laws and some industry specific statutes where you can be held personally liable if you are a director.
Your company’s unpaid GST and taxation offences
It is well known that a director may be held personally liable for the company’s unpaid ‘pay as you go’ (PAYG) contributions. In 2012, the director penalty regime was extended to include personal liability for unpaid superannuation guarantee charge (SGC) contributions. Now, the Federal Government has proposed extending the scope of the regime yet again to incorporate personal liability for the company’s unpaid GST.
Under the current regime:
- if a company has failed to fulfil its PAYG or SGC obligations, the Australian Tax Office (ATO) may serve the director of the company with a Director Penalty Notice (DPN) outlining the unpaid amounts and any remission options available to them;
- if the director fails to arrange payment of the penalty within 21 days of the date of the DPN, the ATO may seek to recover the penalty from the director personally; and
- the penalty will be equal to the unpaid amount of the company's PAYG or SGC liability.
The Government’s proposal to extend the regime to unpaid GST, if implemented, will also enable the ATO to recover unpaid GST amounts personally from the directors of a company. In other words, the directors of a company would be liable to pay to the ATO as a penalty an amount equal to the amount of GST that the company has failed to pay. Directors will be able to discharge their liability for unpaid GST in the same way as payments of outstanding PAYG and SCG contributions. This proposal makes the provision for the payment of GST by your company in addition to PAYG and SCG contributions as important as ever.
Directors can also be personally liable under section 8Y of the Taxation Administration Act 1953 (Cth) if their corporation does or omits to do an act or thing that constitutes a taxation offence. This is because under section 8Y, a person who is concerned in, or takes part in, the management of the corporation will be deemed to have committed the taxation offence of the corporation and will be punished accordingly.
Your company’s breach of the Corporations Act 2001 (Cth)
Directors may be liable as an accessory to their company’s contravention of the Corporations Act under section 79 of the Act if they were ‘involved’ in the contravention.
An example of this is the well-known case of Asic v Adler and 4 Ors  NSWSC 171, where the Supreme Court held that three directors of the collapsed insurance company HIH Insurance Limited (HIH), were ‘involved’ in HIH and its wholly owned subsidiary’s contraventions of section 208 (related party financial benefits without shareholder approval) and the subsidiary’s contravention of s260A (financial assistance for the purchase of shares) of the Corporations Act.
There have been a plethora of cases since then, where courts have found directors liable for breaches of section 79, often in conjunction with the common law rule in Barnes v Addy. See, for example, ASIC v Australian Investors Forum Pty Ltd & Ors (No 2)  NSWSC 267, where a director was held to be accessorily liable under section 79 for the company’s contravention of section 727(1) of the Corporations Act, which requires a disclosure statement to be lodged before an offer of securities is made.
These cases demonstrate the importance of ensuring that your company complies with its obligations under the Corporations Act and that you are fully aware of your obligations to minimize your exposure to personal liability. Preventing a contravention by your company in the first place is the best form of protection against this type of liability.
Your company’s infringement of workplace laws
The Fair Work Act 2009 (Cth) is another law where directors can be held personally liable as an accessory to a contravention of the Act. This Act sets out the rights and obligations of employees and employers in relation to matters such as industrial action, enterprise agreements, workplace discrimination, unfair dismissal, adverse action and the national employment standards.
Section 550 of the Act provides that a person who has been involved in the contravention of a civil penalty provision of the Act is taken to have contravened that provision themselves. Therefore, directors, officers, managers, consultants and contractors who have been involved in a company’s contravention of a civil penalty provision may be personally liable for the actions of that company. The Fair Work Ombudsman (FWO) has revealed that in 2015, 92% of the matters that were filed in court by the FWO sought orders against accessories.
In the matter of FWO v Step Ahead Security Services Pty Ltd & Anor  FCCA 1482, the first respondent, Step Ahead Security Pty Ltd (the Company), had contravened Act by underpaying its employees a total of $22,779.72. The Court held that the director of the Company was, for the purposes of s 550(2) of the Act, involved in the Company’s contraventions of the Act. The Company and director were ordered to pay the unpaid wages to the employees. In addition, the Court imposed a penalty of $257,040 on the Company and $51,408 on the director.
Another statute governing the workplace that impacts upon directors is section 27 of the Work Health and Safety Act 2011 (NSW) and equivalent Commonwealth Act. These laws impose a duty upon officers of a ‘person conducting a business’ (which includes a company) to exercise due diligence to ensure that the company complies with that duty or obligation. The penalty for a failure to exercise due diligence may be equal to the penalty faced by the company.
It is important that directors seek legal advice about the obligations that apply to their company under workplace laws, and implement adequate internal reporting, audit and due diligence processes to monitor the company’s compliance with its obligations, such as the payment and treatment of employees. Procedures for avoiding breaches of a company’s obligations under workplace laws should also be put into place to minimise the risk of directors being held personally liable for the company’s actions. Other strategies involve including clauses in contracts with suppliers, contractors, employees and the like to ensure that they comply with the requirements of the relevant Acts.
Industry specific statutes
Additional duties and obligations may be placed upon directors and officers depending on the nature of the activities that their company engages in or the industry that their company operates in by industry specific legislation.
The following are examples of some of the statutes that may apply.
- Protection of the Environment Operations Act 1997 (NSW)
This Act imposes accessorial liability, executive liability and special executive liability on directors and managers of companies that contravene certain provisions of the Act. Offences include polluting water, transporting waste to a place that cannot lawfully be used as a waste facility for that waste, and negligently disposing of waste in a manner that harms or is likely to harm the environment.
- Liquor Act 2007 (NSW) and Gaming Machines Act 2001 (NSW)
Section 71 and 199A of these Acts, respectively, enable a director (or person involved in the management of the company) to be held liable as an accessory to the company’s contravention of the Act. Offences that a director may be liable for include selling liquor without a licence to do so under the Liquor Act, and possessing, supplying, selling or installing a gaming machine that is not approved under the Gaming Machines Act.
- Heavy Vehicle National Law (NSW) also known as the ‘Chain of Responsibility’ (CoR) law
If your company consigns, packs, loads or receives goods as part of your business, you could be held liable for breaches of this legislation even though you have no direct role in driving or operating a heavy vehicle. This is because employers, prime contractors, vehicle operators, packers of goods and loading managers of goods can be liable for contraventions of certain mass, dimension or loading restraints, fatigue or speed laws under sections 183, 219, 261 and 315 of the Act.
For example, you could be liable as a director if a person who your company employs drives a heavy vehicle on a road that does not, or whose load does not, comply with the mass, dimension or loading requirements applying to the vehicle. Changes to these laws are coming in mid-2018 to align them more closely with workplace health and safety laws. It is important to understand how these laws may impact you.
- Home Building Act 1989 (NSW)
This Act imposes accessorial liability, executive liability and special executive liability on directors and managers of companies that contravene certain provisions of the Act. For example, a director may be liable if their company represents that it is the holder of a contractor licence, and the director knows that it does not hold that contractor licence.
- Sex Discrimination Act 1984 (Cth)
Section 105 provides that a person who causes, instructs, induces, aids or permits another person to do an act that contravenes certain provisions of the Act (pertaining to discrimination in work and other areas) is taken to have done that act themselves. For example, a director of a company that provides goods or services may be held personally liable if that company discriminates against a person based on the person’s sex, sexual orientation, pregnancy or marital status by refusing to provide the person with goods or services, or in the manner or terms or conditions on which the goods or services are provided to the person.
What can you do?
It is important to understand the laws that impact on your business so that you can put in place appropriate measures to ensure your company complies with its obligations. Being aware of your obligations and making sure that your company is compliant, is an effective way to reduce your risk of being held personally or accessorily liable under statute.