Company directors typically operate under the protective umbrella of limited liability, which shields their personal assets from the company’s creditors.

However, under Australian law, there are specific circumstances in which directors can become personally liable for the debts incurred by their company.

The Basics of Director's Liability

The Corporations Act 2001 (Cth) lays out the primary legislative framework governing the duties and responsibilities of company directors in Australia. Generally, directors are not personally responsible for the debts of the company or which they act as a director; however, there are exceptions to this rule:

1. Insolvent Trading

One of the most significant risks of personal liability arises from insolvent trading. Under section 588G of the Corporations Act, directors are prohibited from incurring new debts if the company is insolvent or becomes insolvent by incurring the debt. Insolvency here refers to the inability of the company to pay all its debts as and when they become due and payable.

If a director allows the company to incur debts when the company is insolvent, they can be held personally liable for these debts. Moreover, penalties for insolvent trading can include financial penalties and criminal charges, particularly if dishonesty is found to be a factor.

2. Personal Guarantees

Directors often provide personal guarantees to secure financing or business leases, which can create personal liability. If the company fails to meet its obligations under such agreements, the director can be held personally liable to the extent of the guarantee. It is essential for directors to fully understand the terms and implications of any personal guarantee they sign.

3. Director Penalty Notices (DPN)

The Australian Taxation Office (ATO) can issue Director Penalty Notices to recover unpaid company tax liabilities, including PAYG withholding amounts and superannuation guarantee charges.

Directors can become personally liable for these amounts if they fail to ensure the company meets these tax obligations. Importantly, directors cannot avoid liability by resigning, and newly appointed directors have a limited time window to address any liabilities inherited from previous management.

4. Breaches of Statutory Duties

Directors are also bound by statutory duties under the Corporations Act, including the duty to act with due care and diligence, to act in good faith in the best interests of the company, and not to improperly use their position or information. Breaching these duties can lead to personal liability if the breach leads to financial losses for the company.

5. Environmental Laws

Specific statutes, such as environmental protection laws, can impose personal liabilities on directors for offences committed by the company. For example, if a company causes environmental harm, directors may be personally liable if they authorised or permitted the offending conduct.

Mitigating Risks

To mitigate the risks of personal liability, directors should:

• Conduct regular financial reviews:

Ensuring that they are aware of the financial status of the company at all times.

• Seek professional advice:

Consulting with legal and financial advisors to understand their risks and responsibilities.

• Implement robust governance practices:

Establishing and maintaining strong internal controls and compliance systems.

While the role of a director can be rewarding, it comes with significant responsibilities and potential liabilities.

Understanding these liabilities and taking proactive steps to manage them is crucial for every director.

By maintaining high standards of corporate governance and compliance, directors can not only fulfil their duties effectively but also protect themselves from personal liability.

This comprehensive approach not only helps in safeguarding personal assets but also contributes to the overall health and sustainability of the company they direct.