Australian Financial Services Licensing (AFSL) Forum

This topic contains 1 reply, has 2 voices, and was last updated by Grant Holley Grant Holley 4 years, 3 months ago.

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    licencefx
    Member

    I have read that a director / RM can be held personally liable for breaches of best interest duties and conflicted remuneration payments. Aside from the normal directors duties, when else could they be held personally liable?

    #5002 Reply
    Grant Holley
    Grant Holley
    Member

    Hello licencefx,

    Thank you for your question.

    A responsible manager (‘RM’) cannot be held personally liable under the Corporations Act 2001 (Cth) purely by virtue of being an RM.  Directors, on the other hand, may be liable in certain circumstances.  We invite you to read our blog post on this topic if you would like more information about an RM’s liability.

     

    Best interests duty and ban on conflicted remuneration 

    The best interests duty, imposed on providers of financial advice, obliges them to act in the best interests of their client.  The ban on conflicted remuneration restricts the manner in which a financial adviser can be paid by a product issuer.

    These are not directors’ duties per se, and instead apply to the particular individual who provides the personal advice.  Directors are not held personally liable purely due to being the director of the company.

    More information can be found in ASIC’s RG 175 – Licensing: Financial product advisers – Conduct and disclosure and RG 246 – Conflicted Remuneration.

     

    General directors’ duties and other instances of personal liability

    You are correct that in some circumstances directors may be held personally liable for breaches of their duties.  These general duties include obligations relating to acting with care and diligence, and in good faith, as well as proper use of their position and information they have obtained through their position (see Part 2D.1 of the Corporations Act – Duties and Powers).

    In a recent case, directors were found liable for a breach of their duty to act with care and diligence by promoting a business model that required advisers to breach the best interests duty.

    It is important to note that a director’s obligations may continue even after the company has ceased trading and has been deregistered.

    Broadly, the key areas where a director may be held personally liable are:

    • Debts incurred when the company becomes insolvent;
    • Company losses caused by a breach of directors’ duties;
    • When acting as guarantor or providing security over personal assets;
    • Debts incurred by the company acting as trustee;
    • Illegal phoenix activity (intentionally transferring assets from an indebted company to a new one to avoid paying creditors, tax or employee entitlements); and
    • Other regulatory action that might be taken.  For example, relating to tax obligations under the ATO’s Director Penalty Regime or Superannuation Guarantee Charge obligations.

    More information on these main circumstances can be found in on ASIC’s website – ‘Directors’ liabilities when things go wrong’.  Unfortunately, it is difficult to list every possible circumstance in a comprehensive manner as a range of different laws may apply, depending on the particular industry and activities of the business.

    Apart from civil liability, it is worth noting that criminal liability may apply in some cases. ASIC also has the ability to issue banning orders under s920A of the Corporations Act.  These prohibit specific persons from providing certain financial services.  Banning orders may be effective for a specific amount of time, or be permanent.

     

    Please feel free to contact our financial services team if you require further assistance.

    Authors: Grant Holley (Partner), Matthew Twomey (Lawyer) and Nicolette Tan (Law Clerk)

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