Company director liabilities when things go wrong
New ID requirement for directors
Company directors are now required by law to apply for a director identification number (director ID). Find out more at our Director ID information page.
In certain circumstances, company directors may be personally liable for the company’s debts and regulatory action can be taken against them. Here we explain the key areas of personal liability for you as a director.
- How long are directors liable for a company?
- Are directors liable for company debts, losses or tax debts?
- What happens if a company director uses a home to guarantee a company loan?
- Are directors liable for debts incurred by companies acting as trustees?
- What is illegal phoenix activity?
- What are the consequences of failing to perform director duties?
- Are shareholders liable for company debts?
How long are directors liable for a company?
Once a company is registered, its separate legal status, property, rights and liabilities continue until we deregister the company. Your obligations as a director may continue even after the company has ceased trading and has been deregistered.
Are directors liable for company debts, losses or tax debts?
Under certain circumstances, directors may be liable for debts incurred by the company when the company is unable to pay those debts, as and when they fall due and payable (i.e. the company is insolvent). This is because one of the fundamental duties of a director of any company is to ensure that the company does not trade while it is insolvent.
Common signs of insolvency include:
- low operating profits or cash flow from the business
- problems paying trade suppliers and other creditors on time
- trade suppliers refusing to extend your business further credit
- problems with meeting loan repayments on time or difficulty keeping within overdraft limits
- legal action taken, or threatened, by trade suppliers or other creditors over money owed to them.
To determine if a company is trading while insolvent, directors need to assess the company’s:
- cash flow – determine whether your company’s anticipated current and future cash flow will be sufficient to pay current and future debts as and when they fall due and payable
- financial position as a whole – can the company liquidate (i.e. sell) sufficient assets to pay debts as and when they fall due?
If you allow the company to trade while insolvent, you may be acting illegally and be in breach of civil and criminal provisions of the Corporations Act.
Read more about what happens to directors of an insolvent company.
Liability for company losses
Another way you can become personally liable as a director is where, as a result of you breaching your duties, you have caused the company to suffer some loss.
Under these circumstances you may have acted illegally, be in breach of civil or criminal provisions of the Corporations Act and you may have to compensate the company for the loss.
Remember, a director’s obligations may continue even after the company has ceased trading and has been deregistered.
Liability for company tax debt
As a director, you may also be liable for breaches of other laws administered by other agencies. For instance, you may be held personally liable for outstanding tax obligations of the company under the Australian Taxation Office’s (ATO’s) Director Penalty Regime, particularly when the company has employees. As a director, you have a legal responsibility to ensure your company meets its Pay As You Go (PAYG) withholding and Superannuation Guarantee Charge (SGC) obligations.
If the company does not meet these obligations, you may become personally liable for a penalty equal to these amounts.
What happens if a company director uses a home to guarantee a company loan?
A bank, trade creditor or anyone else providing finance or credit to a company may ask you for:
- a personal guarantee of the company’s liabilities, or
- some form of security over your house or personal assets to secure the company’s performance of its obligations.
This is a common commercial practice. For example, you may be asked by a bank to give a mortgage over your house to secure the company’s repayment of a loan. If the company does not repay the loan as agreed with the bank, the bank may enforce its right to recover the loan by taking possession or selling your home.
Where you provide personal guarantees, you may become personally liable for the repayment of company loans or debts.
Are directors liable for debts incurred by companies acting as trustees?
If you are a director of a company that is acting as a trustee of a trust, you may become personally responsible for liabilities incurred by the company if:
- the trustee company breaches the terms of the trust
- the trustee company acts outside its scope of powers as a trustee, or
- the terms of the trust deny or limit the trustee company’s rights to be indemnified against the liabilities.
What is illegal phoenix activity?
Illegal phoenix activity occurs when a new company, for little or no value, continues the business of an existing company that has been liquidated or otherwise abandoned to avoid paying outstanding debts, which can include taxes, creditors and employee entitlements.
This illegal practice usually happens when company directors abandon the company or transfer the business of an existing company to a new company without paying true or market value, leaving debts with the old company. Once the assets have been transferred, the old company is placed in liquidation or abandoned. If the liquidator is appointed, there are no assets to recover, which means creditors cannot be paid.
Find out the warning signs of illegal phoenix activity.
What are the consequences of failing to perform director duties?
If you fail to perform your duties as a director, you may:
- be investigated, charged and convicted of a serious criminal offence
- have contravened a civil penalty provision and the court may order you to pay a fine
- be personally liable to compensate the company or others for any loss or damage they suffer
- be disqualified from managing a company.
Are shareholders liable for company debts?
The members of a ‘limited’ company are not liable (in their capacity as shareholders) for the company’s debts. As shareholders, their only obligation is to pay the company any amount unpaid on their shares if they are called on to do so. However, members who are also directors may become personally liable under certain circumstances.