The changing landscape of directors’ personal liability





The scope of directors’ duties and personal liability is difficult to put a circle around.

The full gamut of duties and liabilities flow from countless sources, and change with circumstances, capacities and industries.


On top of that, it’s an ever changing landscape; with new laws, policies and enforcement plans keeping the corporate world on its toes.

Here’s a few changes to look out for that may directly hit the personal hip pocket.


Director penalty notices (DPNS)

The ATO can issue DPNs for their company’s failure to meet PAYG and superannuation guarantee obligations.

If the bill passes, the DPN regime will extend to GST and will allow the Commissioner to collect unpaid GST on the basis of estimates.

The DPN (the amount of the Company’s unpaid liability) is recoverable from a director within 21 days of issue.


Illegal phoenixing laws

Creating new companies to continue the business of a company that has been liquidated to avoid meeting its debts and obligations can involve breaches of director’s duties, fraud and asset stripping.

Existing measures include:

  • A reporting and tip-off process (via the ATO) to facilitate dobbing in;
  • ASIC surveillance and compliance (using data analytics) – with a focus on those associated with failed companies;
  • ASIC liquidator assistance program – assists liquidators to obtain information and prosecute directors;
  • ASIC investigations, prosecutions and director disqualifications.

The new Phoenix Bill:

  • introduces new criminal offences and civil penalty provisions for company officers (and others) who fail to prevent “creditor-defeating dispositions”;
  • extends liquidators’ powers to void such transactions;
  • allows ASIC to recover stripped assets.

Prison terms are proposed to increase from five years to 10, with larger fines.

And it’s not just directors who can be caught in the net. Pre-insolvency advisers, valuers, liquidators and dummy directors and ‘controlling minds’ (those that ultimately benefit) can be held equally responsible.


Director identification numbers (DINS)

The requirement to have a DIN will make it even harder for directors to avoid the above measures.

All “eligible officers” (directors, and potentially company secretaries) will be required to verify and record their identity with a new Registrar.

Civil and criminal penalties will apply to contraventions such as failure to apply prior to appointment (or if directed), applying for multiple DINs or misrepresenting a DIN – Up to $200,000 and imprisonment for 12 months for applying for multiple DINs.

While the current Bill has lapsed, it forms part of the Federal Government’s anti-phoenixing war, and is expected to be reintroduced.


Sham contracting – contractor or employee?

Getting the distinction between contractor and employee right is harder than you think.

The consequences of getting it wrong include:

  • penalties of up to $54,000 for each contravention;
  • compensation payments to the “employee”;
  • unpaid PAYG and superannuation;
  • underpayment of payroll tax;
  • tax consequences of “personal services income” for the “employee”

Anyone involved in the sham contracting arrangement (including your management or even your lawyers) can attract liability.

We have a simple questionnaire that could make all the difference.


Industrial manslaughter laws

A number of jurisdictions in Australia (including ACT, Queensland and pending in Victoria) now have industrial manslaughter laws.

These laws attach criminal responsibility to an employer (or its directors or officers) that causes the death of a worker – but only as a result of negligent conduct.

Maximum penalties are 20 years’ imprisonment and substantial fines for corporations (Vic: $16 million; Qld: $10 million; ACT $1.62m).


Section 180 & ‘stepping stone’ liability

Section 180 is effectively the statutory duty of care imposed on directors.

It’s the duty to act with the degree of care and diligence expected of an officer, with the same responsibilities, and in the corporations circumstances.

‘Stepping stone’ liability involves a primary breach by the company – which can be traced back to a breach of this statutory duty.

ASIC failed to make the leap in earlier prosecutions (ASIC v Maxwell (2006); ASIC v Mariner (2015))

– but got there in ASIC v ASIC v Padbury Mining Ltd (2016) and ASIC v Sino Australia Oil and Gas Ltd (2016) – and most recently, in ASIC v Vocation Ltd (2019). These three cases all involved the companies’ failures to discharge continuous disclosure requirements.

It is expected this trend will continue.


Practical steps

  • Keep educated – numerous courses are available for directors. Ensure you stay on the Macpherson Kelley mailing list for seminars and articles.
  • Delegation is fine – but the liability sits with you – so keep up the oversight.
  • Good systems are a must – you need eyes and ears to filter information back to you. You can’t fix what you don’t know about.
  • Don’t assume you know the law – get advice, and help drafting contracts.
  • Keep a paper trail – You can’t prove you took ‘reasonable steps’ or acted appropriately without proof.
  • Choose ‘yes men’ advisers at your own peril.

Originally published on 17 September 2019 on the Macpherson Kelley website.


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