When Will a Director be Held Responsible for Company Debts?

A company is generally set up so that its owners and directors don’t pay the debts. This is because your company by law exists as a separate legal entity. If you meet your legal duties as a company director, any debts or liabilities will be the company’s responsibility and not yours personally. However, be aware that there are some instances where you may become personally liable. Generally speaking, a lot of these instances relate to situations where directors fail to perform their duties. The most common ones include:

Insolvent Trading

The Corporations Act 2001 requires directors to ensure their company does not operate while they’re insolvent. Basically if your company continues to incur debt when it can’t pay back it’s outstanding amounts, the directors are failing their duty. This can result in various criminal and civil penalties, and may make you personally liable to compensate the company. If you face this issue at your company, ASIC provides guidance  for directors dealing with potential insolvency.

Breaching Director Duties

If your company suffers any loss as a result of you breaching your duties as a director, you can become personal liable. In addition to ensuring insolvent trading does not occur, there are a number of other obligations you must meet. Some examples include the duty to act in good faith, to properly use your position, and comply with tax requirements. Along with potential regulatory action, you will personally compensate the company or it’s creditors as a result of your breach.

Personal Guarantee

Personal guarantees or security act as a fall back when your company can’t pay its debts. If you provide a guarantee to your company’s creditor, you will become personally liable if the loan isn’t repaid. For example, your company may take out a loan from a bank and as director you offer your house as security. If the company is struggling and doesn’t meet its repayments you may lose your house.

Phoenix Activity

This is where directors of a company that is struggling purposely place it into liquidation so they can avoid paying its debts. They then continue the same business but under a completely new company name. This is illegal and you will be liable if you engage in this activity as a director.

Still unsure? Contact a LawPath consultant on 1800 529 728 to learn more about customising legal documents, obtaining a fixed-fee quote from our network of 1000+ expert lawyers or to get answers to your legal questions.

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