Corporate Laws - Corporation Act 2001



Corporate Laws - Corporation Act 2001

Breaching Common Law & Statutory Duties under the Corporations Act 2001

The case is significant in the way that it has initially provided a defence in particular circumstances where it would provide a defence to a person that has not been officially appointed as a director of the company and is facing claims against liquidators who are on course to wind up the company.

In light of the implementation of section 155 of the Corporations Act 2001, which imposes a requirement on all companies to have at least one director that is a natural person, the practical significance of this judgment is fairly limited.

Liabilities of Directors

As a general rule, directors are not personally liable to the company creditors or to other outsiders. The debts, etc., are the debts of the company, which is a separate legal person from its members or officers. However, there are some exceptional situations where a director may be personally liable to outsiders while the company is still operating. In this case, the exceptions are few:

If a director claims to make a contract on behalf of the company in circumstances where the company is not bound, the director is personally liable to the other party for breach of warranty of authority. This will not often occur today because, by s.35A of the 1985 Act as amended, the company will almost always be bound by the acts of directors on its behalf.

Under the Company Directors Disqualification Act 1986, if a person who has been disqualified by a court order from acting as a director then disobeys the order, he can be personally liable for company debts. Similar rules apply to undercharged bankrupts.

By the Insolvency Act 1986, s.216, someone who was a director of an insolvent company during the last twelve months before it was wound up must not without court consent be a director in a new company with a name too similar to that of the old company for the next 5 years. To do so is a criminal offence, and makes him personally liable for the debts or the new ('phoenix') company. Section 216 also applies to unincorporated businesses.

The Memorandum or a limited company may specifically provide that the liability of directors or managers, or of the managing director, is to be unlimited. 'This is rare.

Exceptionally, it seems that a director may be vicariously liable for torts committed by the company, if he had had extensive control over the company' conduct in connection with the tortuous activity. In Evans & Sons Ltd v. Spritebrand Ltd (1985), a director was held personally liable for a company's breach of copyright.

If the directors of a very small company seek credit from a large lender (e.g. an overdraft for the company from thy bank), the lender may insist that the director's persona ally guarantee repayment. This is probably the most common situation in which directors will be personally liable.

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