Director Personal Liability for Company Debts

5. Directors’ Loans and Company Credit Cards

A company may show “director’s loans” on its books for a variety of reasons. If the company enters Liquidation, the director is personally liable to repay any outstanding loan amounts.

Similarly, you may be held personally liable for outstanding debits on a company credit card. While the credit card is paid by the company, the card itself is usually issued to an individual (such as a director or other company officer).

If the company fails to pay the balance, the credit card company may pursue the card holder for the outstanding amount.

6. Unfair Preference Payments

An unfair preference payment is a payment made to a creditor that unfairly disadvantages other creditors during Liquidation.

Under Section 588FF(1) of the Corporations Act, it’s possible for directors to be held personally liable for money that was paid as part of an unfair transaction.

This includes scenarios where a company enters Liquidation and pays the ATO in preference of other creditors. Section 588FGA of the Act requires directors to indemnify the ATO against any loss resulting from an unfair preference payment.

In this case, the director(s) can be held personally liable for the unfair payment made to the ATO.

7. Underpaying Employee Wages and Entitlements

A director may be held personally liable for underpayment of employee wages and entitlements. The Fair Work Act 2009 makes it illegal to knowingly underpay workers. Under Section 550, a director may be fined up to $187,800 for breaching this requirement. In a case from 2023, the directors of a company were also held personally liable for underpayments made to staff.

8. Breaching Your Duties as a Director

Generally speaking, directors can be held personally liable for company debts if you have breached your duties as a director. Things like insolvent trading and acting against the best interests of the company can lead to personal liabilities for company debts.

The Duties of Company Directors in Australia

Private and publicly traded companies have a duty to act in the best interests of their shareholders. As such, the directors of companies are expected to fulfil certain general duties.

In Australia, company directors have the following responsibilities:

1. To act for a proper purpose – Directors must use their powers to act for a proper purpose. Directors cannot use their powers to give themselves a personal advantage.
2. To act in good faith – Directors must act in the company’s best interests. Directors must act honestly, reasonably and ethically.
3. To act with care and diligence – Directors must act with care and diligence. This includes staying aware of the company’s financial situation, understanding how the company operates, and acting as a “reasonable person” would.
4. To avoid conflicts of interest – Directors must not enter into any agreements where they have personal conflicts. Directs must notify the company of any personal conflicts that relate to transactions the company is making.
5. To prevent insolvent trading – Directors must prevent the company from trading while insolvent.
6. To fulfil administrative duties – Directors must fulfil certain administrative duties. This involves tasks like ensuring tax obligations are met, keeping proper financial records and communicating with shareholders.

Breaching your duties as a director can result in civil and criminal penalties. The exact penalty depends on the nature of the director’s actions.

Doesn’t Limited Liability Protect Directors from Personal Liability?

No. A “limited liability” company protects shareholders from personal liabilities. Directors have a duty of care to the company. As such, they can still be held personally liable for company debts, even if the director is also a shareholder.

Director Penalty Notices (DPNs)

A Director Penalty Notice (DPN) is a notice issued by the ATO that allows them to recover unpaid taxes and superannuation amounts. The ATO may issue a DPN if your company has unpaid amounts in relation to:

• Pay As You Go withholding
• Goods and Services Tax
• Super Guarantee Charge (SGC) liabilities

If you receive a traditional DPN, you have 21 days to respond if you want to avoid personal liability. If you receive a “lockdown” DPN, you can be made automatically liable for company tax debts if the company’s tax returns are not lodged within 3 months of the due date.

Contact Business Savers immediately if you receive a DPN. It’s important to respond quickly to avoid personal liability.

Does Safe Harbour Protect Against Personal Director Liabilities?

Australia’s Safe Harbour laws may protect directors from personal liabilities that arise due to insolvent trading claims. This only applies if the personal liability is incurred while making a genuine attempt to save the business from financial distress.

For instance, if a director notices that the company is about to become insolvent, they could use Safe Harbour to restructure the business in an attempt to save it. Even if the attempt is unsuccessful, the director won’t be held personally liable for debts incurred while trying to save the company.

There are strict requirements surrounding Safe Harbour. Speak to a Restructuring Practitioner immediately if you are attempting to save your company from insolvency and want to claim Safe Harbour.You can read more about Safe Harbour on our website.

What Happens if a Director Can’t Pay their Personal Liabilities?

Company debts are often large in scale. This means it’s common for directors to be unable to pay personal liabilities. When this happens, directors can become personally insolvent, and may need to enter Bankruptcy to resolve the debt.

During Bankruptcy, a Registered Trustee will gather and sell your assets. The Trustee will use any proceeds from the sale to repay your debts.

While most director personal liabilities are discharged under Bankruptcy, Bankruptcy can have a significant impact on your life. You will also be disqualified from acting as the director of a company for the duration of the Bankruptcy (typically 3 years and 1 day).