Liability of Directors in Australian Corporations

Question one
In most of the cases, a corporation is considered as a distinct legal entity (Salomon v A Salomon
and Co Ltd., 1897).1 The result is that in most of the cases, where the affairs of the company are
being managed efficiently, the debts of the company can be enforced only against the company.
However, in some cases where the directors have violated the law, the directors can be held
personally liable for the debts of the company and they may also be held liable for other
regulatory action.2
According to the general rule, the directors of a corporation are not personally liable. However,
the director may be considered as personally liable where there has been violation of duty by the
director and the consequence of such breach is that a loss has to be suffered by the Corporation.
Therefore in such circumstances, where the director acted legally or has breached the civil or
criminal liability provisions mentioned in the Corporations Act, 2001 the director may be held
liable for compensating the company for the loss suffered by it. In case of a breach of duty by the
director, the ASIC may seek criminal or civil penalties against the directors. The director may be
held liable for criminal offense for which the penalty may go up to $200,000 or imprisonment up
to five years of both. In case of the contravention of a civil penalty provision, the director may be
ordered to pay up to $200,000 to the Commonwealth. At the same time, the director may be held
personally liable for compensating the company for any loss or damage suffered by it.
Question two
1 Salomon v A Salomon and Co Ltd [1897] AC 22
2 P Clarke, J. Clarke, 2016, Contract Law, Commentaries, Cases and Perspectives, 3rd Edition, Oxford University
Press

It is very important that the directors remain aware of their duties. These duties have been
imposed by Corporations Act, common law and by the Constitution of the company (Asic v Adler
and 4 Ors., 2002).3 On the other hand, the failure to fulfill the duties imposed on the directors may
have serious consequences.4 These consequences include a jail term up to five years, civil or
criminal penalties that may go up to $200,000 and at the same time, the director may be
disqualified from managing your corporation in future. Another consequence of the breach of
duty by the director is that the director can be held personally liable for the obligations of the
corporation. This can potentially have an impact on the personal assets of the director and may
even lead to bankruptcy. In view of the provisions mentioned above, it can be said that if it is
found that the director of the company has acted in breach of his or her duties and violated the
civil or criminal provisions mentioned in the Corporations Act, the director may be held
personally liable for the obligations of the corporation and at the same time, the director may
also have to compensate the company for any loss that may be suffered by the company as a
result of the breach of duty by the director. It also needs to be noted in this regard that the duties
that have been imposed on the directors continue even after the corporation has ceased to trade or
when it has been the registered.
Question three
All the directors of the corporations have to use the judgment while they are making decisions on
behalf of the company. This is an interesting part of the duties of the directors that it is formally
recognized by the law in the business judgment rule. This role provides a defense to the directors
3 Asic v Adler and 4 Ors [2002] NSWSC 171
4 Daniel Khoury, Yvonne Yamouni, 2010, Understanding Contract Law, 8th Edition, LexisNexis Butterworths

who have made decisions on behalf of the company.5 Hence, the business judgment rule acts as a
legal defense that is available to the directors of the corporation when they have to face
allegations or litigation that the directors have failed to acted with care and diligence. The
business judgment rule has also been added in the Corporations Act, along with the duty of the
directors which requires them to act with care and diligence in section 180 of the Act (ASIC v
Rich, 2009).6 According to this section of the Act, it is necessary that the directors and officers of
the corporation use their powers with care and diligence. However, this is not an absolute duty as
it requires only the level of care that can be expected to be exercised by any reasonable person if
the person was a director of the corporation under similar circumstances. On the other hand, the
business judgment rule has been introduced by the law to recognize the commercial realities and
the potential consequences of the violation of duty by a director or an officer of the corporation.7
Briefly speaking, this rule allows the fact that no commercial decision can be described as
certain. Sometimes decisions made by the directors may result in loss. Therefore if the director
has made the decision in good faith, a defense is available in the form of business judgment rule.
Question four
The two major types of companies in Australia are proprietary and public company. The
proprietary company is the most common type of corporation formed in Australia. Generally it is
signified by the use of the word "Pty" at the end of the name of the company. A proprietary
company is privately held company in Australia. It is commonly used by the parties were
conducting business. The minimum requirement related with the formation of this type of
5 Jane Swanston, ‘Discharge of Contracts for Breach’ (1981) 13(1) Melbourne University Law Review 69
6 Australian Securities and Investments Commission v Rich (2009) 236 FLR 1
7 C Kidd, ‘Partial Performance o Lump Sum Contracts: Proposals for Reform’ (1985) 59 Australian Law Journal96