5 Ways A Director Can Be Sued

Apr 22, 2024 | Publication

Directors can be sued for all sorts of reasons.  Here are 5 of them.

Reason #1: Insolvent Trading

A director can be sued if the company he or she is a director of trades whilst insolvent.  A director has a duty to prevent the company trading and incurring debts if it is insolvent.  A company is insolvent if it is unable to pay its debts when they fall due.  There are various defences to a claim relating to insolvent trading.

It is not enough for a director to rely on a once a year sign off of the company’s accounts.  A director must be constantly aware of the company’s financial position.

Reason #2: Breach of a Guarantee

Typically directors of companies – particularly smaller companies – provide a personal guarantee as a condition of a contract entered into by the company of which they are a director.  Often sole directors must provide a personal guarantee.

What this means is that if the company breaches its contractual obligations the guarantor (i.e. the director providing the personal guarantee) can be personally liable for the breach.  In other words, the director becomes personally liable for the company’s breach.

Reason #3: Work, Health and Safety Breach

Directors can be liable for a breach of a company’s work, health and safety prosecution.  For example, if a person is injured or dies on a work site, SafeWork NSW (assuming the company is carrying on business in NSW) may prosecute not only the company itself but also the directors of the company.

Reason #4: Unpaid Superannuation Obligation

Directors can be personally liable for a company’s unpaid superannuation.  For instance, the ATO can issue a director penalty notice for unpaid superannuation.

Reason #5: Uncommercial Transactions

A director can be personally liable if he or she has received money prior to the company going insolvent.  A liquidator may be able to bring a claim against the director seeking to effectively claw back the transaction.

The information in this publication is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, we do not guarantee that the information in this publication is accurate at the date it is received or that it will continue to be accurate in the future. We are not responsible for the information of any source to which a link is provided or reference is made and exclude all liability in connection with use of these sources. If you do not wish to receive newsletters from us, please let us know.

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