Generally, if a contract is entered into by a company and that company has breached the contract, then only the company will be liable and not its directors. Directors are not generally liable, because the company is regarded as a separate legal entity or ‘person’, distinct from its directors and members. The protection of directors against liability is commonly referred to as the ‘corporate veil’, as courts do not generally look behind the ‘veil’ to ascertain who is liable.

However, in some circumstances, courts can ‘pierce’ or ‘lift’ this corporate veil. When this occurs, the separate legal personality of the company is disregarded and the directors and shareholders can become personally liable for breaches of contract and debts incurred by the company.

Examples of when directors can become personally liable are:

1. Insolvent Trading

The most common circumstance where the court will look behind the company and to its director is in cases where a director has engaged in insolvent trading.

Under section 588G of the Corporations Act 2001 (Cth) a director is under a duty to prevent the company from incurring debts if there are reasonable grounds for suspecting it is insolvent. Therefore, under certain circumstances, directors can be liable for debts incurred by a company when that company is unable to repay those debts as and when they fall due.

The Corporations Act notes that those directors who are found to be trading whilst insolvent are liable to pay compensation to the company of an amount equal to the loss or damage suffered by unsecured creditors. Further, civil penalties and criminal charges may also apply against a director if there was dishonestly involved in incurring the debts.

2. Personal Guarantees

In some contracts, personal guarantees are provided by the director should the company fail to meet its contractual obligations. These are most commonly seen in business loans, financial arrangements and leases. These clauses are extremely significant and proper advice as to its consequences should be sought prior to signing. These clauses effectively dispose of the ‘corporate veil’ and a director can be sued directly for the breach.

However, certain personal guarantees can ‘cap’ a director’s liability in the event of the company’s default, such as the amount or type of loss recoverable or remedies available. The wording of the guarantee is important, if the clause is too wide or ambiguous in respect of the particular breach, the court may rule that a director remains fully liable.

3. Uncommercial Transactions

Directors may also become personally liable where a company enters into a transaction that proves detrimental to the company and the transaction is director related. Examples of these transactions include when property or securities are transferred to a spouse, friend or related company and the transaction provides no benefit to the company. For example, transferring a property for less than market value.

If a breach of contract has occurred and there are minimal or no assets in the company or directors name, the court or liquidator can set aside those transactions where a director has knowingly assisted in transferring the asset. Liquidators and courts can pursue these uncommercial transactions up to two years prior to the winding up of the company.

De facto or shadow directors

It is important to remember that both de facto and shadow directors have the same statutory duties and liabilities as appointed directors and can be held liable for breaches of directors’ duties. This is the case regardless of whether they are recorded on the ASIC register or not.

Tips for Directors

Directors should be aware of which legislation covers the activities of the contract and company. Directors should also seek advice on the obligations and duties imposed on both the company and themselves. Further, regular financial health checks are conducted on the company and other procedures are developed in order to minimise risks of the company breaching any of its liabilities.
Seek advice on any indemnity clauses contained in contracts and where possible, try to limit director liability in such clauses.

How can Sharrock Pitman Legal help?

For further information on director liability in instances where the company has breached a contract, feel free to get in touch. We have an Accredited Specialist in Commercial Law and our experienced Commercial Litigation team is able to advise and assist you. Please contact us on 1300 205 506 or by email at litigation@sharrockpitman.com.au.

The information contained in this article is intended to be of a general nature only and should not be relied upon as legal advice. Any legal matters should be discussed specifically with one of our lawyers.

Liability limited by a scheme approved under Professional Standards Legislation.

Written by a member of our Legal Team

For further information contact

Caroline Callegari

Caroline Callegari is an Associate Principal and leads our Disputes & Litigation team. She has an advisory and advocacy practice in the following areas: Commercial Litigation, corporate and personal disputes, debt recovery and, insolvency and bankruptcy matters. Caroline can be contacted on (03) 8561 3324.

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Building and Construction Industry Security of Payment Act (Vic)

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However, in this article we will set out the factors that influence how long it will take to obtain a Grant of Probate and to administer an estate in Victoria.

The basics

First things first: what is a Grant of Probate? A Grant of Probate is effectively a document issued by the Supreme Court of Victoria which formally authorises an executor to manage the estate of a deceased person in accordance with their Will. Without Probate, the asset holders (say a bank or share registry) cannot be satisfied as who has the correct authority to receive the deceased's assets and may refuse to pay out.

Sometimes, for smaller estates or if assets are mostly jointly owned with a surviving spouse, asset holders might agree to release payment without requiring a Grant of Probate. This is usually on the basis that the person who receives payment promises to repay (or Indemnify) the asset holder if it turns out they paid to the wrong person.

If there is no Will, then you cannot obtain a Grant of Probate. Instead you obtain Letters of Administration. This is effectively the same, in terms of authorising someone to administer the estate, and would usually be obtained by the person who is the closest next-of-kin to the deceased.

“A Grant of Probate is effectively a document issued by the Supreme Court of Victoria which formally authorises an executor to manage the estate of a deceased person in accordance with their Will.”

Timeframes for Probate in Victoria

In order to obtain a Grant of Probate, the Supreme Court needs to be given information about the assets and liabilities of the estate, the deceased person, the witnesses to the Will, the executors and the Will itself. An advertisement of your intention to apply for Probate must also be published on the Supreme Court website for at least 14 days prior to any application being lodged.

Often, making enquires to obtain all the necessary information can take a number of weeks. Also, you will need the Death Certificate for the application for Grant of Probate and possibly for making proper enquires regarding the assets and liabilities. Waiting for the Death Certificate to issue can therefore add a few more weeks to the process. Overall, if you have your application for Grant of Probate lodged within 1 to 2 months from the date of death, you are making timely progress.

The Court itself usually does not take long to process the application (maybe another 1 to 2 weeks) and this is completed using the electronic Supreme Court filing system. This means you do not have to go to a Court hearing. The timeframe for processing applications for Letters of Administration is even less, given that there is no Will document for the Court to consider. There is also a general discretion for the Court to raise a 'Requisition' asking for more information before they review the application - this can sometimes delay matters.

“Overall, if you have your application for Grant of Probate lodged within 1 to 2 months from the date of death, you are making timely progress.”

So, here we are a few months after death and you finally have a Grant of Probate or Letters of Administration. It is important to remember that this is the start of the estate administration and not the end. For a very simple estate, you might only need a further month or so to cash the assets and pay them to the correct beneficiaries. However, it can often be more complex than that. Factors that determine the timeframe to administer the estate include:-

Some assets will take time to cash or transfer. For example, if selling a property, final settlement might be 60/90/120 days from the day of sale.
There is a 6 month period for challenges to be brought against the estate and executors must wait until this period expires before distributing the estate, if there is any risk that a disgruntled family member might come forward.
There might need to be final tax returns for the deceased or for the estate. Failing to wait for the ATO to process these could leave the executor personally liable for a tax bill.

You might need to advertise for creditors to come forward and wait for a period of months while this advertising timeframe expires. This protects the executor if they are unsure of all of the deceased's financial dealings and creditors.
It might not always be a good time to immediately cash estate assets. For example, the shares just took a nose-dive, do you still sell regardless of available price?

There is a general rule that executors have an 'executor's year' to complete the estate administration. This means that you should be aiming to have the estate finalised and distributed within 12 months from the date of death.

Liability limited by a scheme approved under Professional Standards Legislation.

Need help with Probate?

Our expert legal team is ready to take your call!

Mitchell is the Managing Principal of Sharrock Pitman Legal. He is an Accredited Specialist in Commercial Law (accredited by the Law Institute of Victoria). He also deals with areas of Employment Law, Wills & Estate Planning and Probate and can answer all your questions related to probate.

For further information, contact Mitchell on his direct line:

DIRECT LINE:

(03) 8561 3318

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Directors liability for breach of contract

1. Insolvent Trading

2. Personal Guarantees

3. Uncommercial Transactions

De facto or shadow directors

Tips for Directors