Personal liability for inactive directors: Kim v JM World AU Pty Ltd (in liq)
Introduction
In the case of Kim v JM World AU Pty Ltd (in liq) [2026] NSWCA 146, the NSW Court of Appeal upheld the trial judge’s finding against two directors for breach of directors’ duties in relation to, among other things, transfers of company funds to overseas related entities while the company was insolvent. This included the majority finding that ruling that one of the directors, who was entirely inactive throughout the entire process was liable.
Background
A married couple, Mr Bak and Ms Kim were the two directors and only shareholders of JM World AU Pty Ltd (“JWM”).
However, Ms Kim was a highly inactive director. She was not informed by Mr Bak that she had been appointed as a director of JMW until sometime following her actual appointment and was told that she had been made a director “just in case”. Consequently, throughout the entire period, she had no understanding of her responsibilities as a director or what the role entailed and did not have any real involvement in the affairs of the company.
In February 2019, JMW entered into a contract with SDC for building works on a property at Killara (the SDC Contract). Ms Kim owned a 99% share in the property, with Mr Bak owning the remaining 1% share.
JMW failed to pay SDC’s invoices towards the end of 2020.
In January 2021, JMW was served with a creditors statutory demand following District Court Judgement against them for $519,473.41 in judgement debt.
In March 2021, JMW signed a contract of sale for its property at Roseville. On the day after settlement of this sale occurred, Mr Bak caused JMW to make a series of payments totalling roughly $980.000 to two companies he was associated with in South Korea and a company in Japan which supplied the Korean companies (the May Transactions).
In June 2021, JMW was wound up by the Court and a liquidator was appointed. The liquidator commenced proceedings against Mr Bak and Ms Kim for breach of directors’ duties.
The trial judge found in favour of the liquidator, holding that both Mr Bak and Ms Kim were personally liable for breach of directors’ duties. They were ordered to pay the company on a compound interest basis, with their owing amounts secured by an equitable charge against the Killara property.
Mr Bak and Ms Kim each appealed the trial judge’s findings.
Issues
Was the SDC Contract with JMW or Mr Bak personally?
Was JMW insolvent by the time the transfers to the South Korean and Japanese companies were made?
Was Ms Kim, through inaction, in of breach her duties in a manner which caused JMW’s loss?
Findings
The SDC Contract was with JMW, not Mr Bak personally
On appeal, Mr Bak and Ms Kim argued that JMW did not incur debts under the SDC Contract, because it was signed by Mr Bak in his personal capacity rather than on behalf of JMW. This was largely based on the fact that JMW did not actually own the Killara property as noted above.
However, the Court of Appeal unanimously upheld the trial judge’s conclusion that, on the proper interpretation of the SDC Contract, JMW was the party for several reasons.
in the contract, JMW was expressly identified as the owner of the property;
in the execution clause, Mr Bak signed “on behalf of the Owner…”;
Mr Bak’s signature was accompanied by the capacity “Director” which would have clearly been unnecessary if he was signing in his personal capacity.
Given that Mr Bak had actual authority to enter into such a contract on behalf of JMW, the court considered it was clear that the SDC Contract was with JMW.
JMW was insolvent
Mr Bak did not challenge the finding that, if JMW was insolvent at the time of the May Transactions, this would have constituted a breach of (at least his) directors’ duties. He instead argued that JMW as not insolvent at the time of the May Transactions.
This argument was unanimously rejected by the Court of Appeal.
The Court first noted that, even if JMW was not insolvent, Mr Bak and Ms Kim would still be liable as the May Transactions would still have constituted an unreasonable director-related transaction under section 588FGA of the Corporations Act 2001 (Cth) (for which insolvency is not a requirement).
As the trial judge’s finding of a contravention of section 588FGA had not been challenged on appeal and was itself sufficient to support the orders against Mr Bak and Ms Kim, even success on this ground would not provide a basis to set aside the trial judges orders.
Even so, the Court considered the issue of insolvency and found that JMW was insolvent as of the day of the May Transfers. As it was the large sums being paid out to the South Korean and Japanese entities which left JMW wit no assets to repay creditors.
Ms Kim was personally liable for her breach of duty, and her breach caused JMW’s loss
This was the most contentious issues, with Leeming JA dissenting against the majority regarding Ms Kim’s liability.
It is well established that omissions or inaction can constitute a breach of directors’ duties. Thus, the focus of Ms Kim’s arguments in this matter was as to whether her breach by omissions had a causal connection to JMW’s loss, as causation is a requirement to establish her liability to repay JMW.
The majority considered the causation had been made out based on several factors”
because Ms Kim’s broader inaction allowed Mr Bak to act unilaterally, which he could not have otherwise done had she taken an active role as director and required that major decisions require agreement, or at least discussion between directors. Notably, Mr Bak was not formally appointed managing director and only had authority to act unilaterally as a result of Ms Kim’s acquiesce;
no evidence was provided by either Mr Bak or Ms Kim that suggested that Mr Bak would not have listened to Ms Kim had she raised concerns.
the inference by the trial judge was accepted that, as Ms Kim had acted honestly throughout, it was objectively likely that Ms Kim would have opposed Mr Bak’s actions which constituted a breach of directors’ duties had she been actively involved in the management JMW.
the inference by the trial judge was accepted that, Mr Bak would have listened to Ms Kim if she had raised concerns, it was therefore likely that Mr Bak would have not lied to Ms Kim or continued to act in breach of his directors’ duties had she raised concerns with him.
Consequently, the majority found that Ms Kim’s breaches of duty together with Mr Bak’s actions did cause JMW’s loss and she was therefore personally liable.
Ms Kim should not be granted relief from liability
Ms Kim also argued that, even if her omissions caused JMW’s loss, she should be granted relief on the basis of the Court’s residual discretion under sections 1317S and 1318 of the Corporations Act to relieve a director of liability for a breach where they were acting honestly and “ought fairly be excused” based on the circumstances as a whole.
The circumstance that Ms Kim referred to was an accident in 2013 which left her with psychological issues that impaired her ability to perform the role of director. However, the trial judge declined to relieve her of liability, noting the evidence showing that she was an inactive director prior to the accident, that the severity of her illness was fairly intermittent, and the extent to which relief from liability would prejudice JWS.
The Court of Appeal noted the high threshold required to overturn a trial judge’s exercise of a discretionary power, requiring an error in the reasoning process, of fact, or of principle on the part of the trial judge. This was not made out, and the Court of Appeal declined to overturn the trial judge’s decision not to exercise discretion in favour of Ms Kim.
Key takeaways
Directors who are inactive or unaware of their responsibilities may still face substantial personal liability for failing to prevent breaches’ of duty committed by other directors and be able to be pursued by liquidators for those breaches where found to exist.
Where a director is unable to exercise their responsibilities for reasons of illness, the safest option is to step down to avoid risking personal liability potentially arising.
If you have any questions about this article or the issues it raises, please contact us.
Alicia Hill
Principal
T: +61 3 9611 0180 | M: +61 484 313 865
E: ahill@sladen.com.au
This article was prepared with the assistance of Tony Huang, Law Clerk.
