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.
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