A corporation, as a separate legal entity, can sue and be sued in its own name, meaning that the company is responsible for its own liabilities and debts. In general, this means that the directors are not personally liable for the company’s affairs.
Directors have to make use of their powers and perform their duties with a certain level of care and conscientiousness. They have to fulfill certain principles when acting on behalf of the business. All directors should:
- Act honestly and in good faith in the best interest of the business,
- Avoid conflicts of interest,
- Have an appropriate level of knowledge when making decisions for the company, and
- Truly believe that the actions taken on behalf of the business are for the best interests of the corporation.
If a director is negligent and fails to carry out duties in accordance to the above principles, he or she can be personally liable for the damages caused to the business. Normally, it is the company that acts as plaintiff to remedy wrongs done by directors. If the company is insolvent and a liquidator is appointed, the liquidator can also start proceedings against the directors in the name of the company.
There are various ways to raise a claim against the directors of a company. Claims can be made for damages and compensation, rescission of contract, property and constructive trusts, return of property and account of profits. It is possible to raise more than one claim against the directors of a company.
Damages or compensation
If the company has incurred losses because of a breach of duties by the director, it can apply for damages or compensation. The purpose of the rules is to restore the company to the same position as before the damage was caused by the directors. The directors of a company are jointly liable for debts and damages caused to the business. This means that the company has the opportunity to sue one of the directors for the full amount of the loss. The director subject to the claim can turn to the other directors to seek compensation.
Account of profits
A director may have breached his or her duties even though no loss has been suffered by the company. Such a situation arises when a director is found liable for conflict of interest, from which he or she has gained personal profits. The profits must be returned to the company which can be made by making a claim for account of profits.
Rescission of contract
The company can make a claim for rescission of contract if the directors of the business have private interests related to the agreement. The purpose of this type of claim is to revoke unfavorable agreements to which the company does not want to be bound. When an agreement is being revoked, all that has been exchanged needs to be returned. If a director has gained profit from the unfavorable contract, a claim for account of profit needs to be made.
Return of property and constructive trusts
If a director has gained property by breaching the duties owed to the company, the director can be forced to hold the property on constructive or resulting trust, which means that it is returned to the company. Claims for constructive trusts may also be made in order to recover property from third parties.
A company is insolvent if it cannot pay its debts in due time. A director needs to be aware of the company’s financial status when acting on behalf of the company. If the director suspects or has reasonable grounds to believe that the company is insolvent, or may become insolvent in near future, he or she should not burden the company with additional debts.
If the company is insolvent, the best interest of the company becomes the interests of creditors rather than the interests of its shareholders. If a director gives assets away that belong to company or sells them for less than market value, there is a breach of duty since the director is not acting in the best interest of the company, its creditors or shareholders.
The director also has the responsibility and duty to keep financial records and to explain transactions and the company’s financial position. If a director is liable for insolvent trading, the company is presumed to have been insolvent during the time for which financial records are missing.
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