It’s generally accepted that a company provides a level of asset protection, because a company is a separate legal entity. From the time a company is first registered with ASIC up until it’s final deregistration date, it is viewed as having separate legal status, property, rights and liabilities.
This gives directors some protection and makes a company a good structure for running a business , but it doesn’t fully absolve directors from being responsible for a company’s liabilities and debts. Directors can be found to be personally responsible for debts and liabilities in certain instances, and these obligations continue even after the company is deregistered.
The Australian Investment and Securities Commission (ASIC) is in charge of assessing the liability of directors in accordance with the Corporations Act 2001. Examples of instances where directors may be found to be personally liable for company debts include;
Insolvent Trading
Directors have a duty to ensure that companies do not trade while insolvent. If this duty is breached directors may face civil and criminal provisions or become liable for company debts. A company is classified as insolvent if it is unable to pay its debts as and when they fall due.
To determine insolvency, both the cash flow and financial position of the company need to be assessed. If the company is deemed to be trading while insolvent, potential director defences include;
- The director had reasonable grounds to expect solvency at the time the debt was incurred
- The director had reasonable grounds to believe a competent and reliable person provided adequate information that identified the company as being solvent
- The director did not participant in management due to illness or good reason at the time the debt was incurred
- The director took all reasonable steps to prevent the incurring of the debt
Company Losses
If directors breach their duties and this causes the company to suffer a loss they can be found personally liable.
Potential consequences of breaching duties may find directors as having acted illegally and not in accordance with the Corporations Act, they may face civil and criminal provisions or be made to compensate the company for the losses incurred.
Guarantee and Security
Directors may provide personal guarantees or collateral to secure company liabilities (e.g. to finance a bank loan). If a company defaults and is unable to fulfil their liabilities, directors may lose collateral assets (e.g. their home) or be made to repay company liabilities personally.
Company Tax Debt
Directors have a responsibility to ensure companies meet their PAYG withholding and Super Guarantee Charge obligations. A consequence of non-compliance may find directors personally liable for a penalty equal to the company obligations.
Phoenix Activity
Directors can’t establish a new company to continue the activity of an existing company that has been placed into administration or liquidation to avoid paying outstanding entitlements. As a result directors may face civil and criminal punishment as well as imprisonment.
Trustee
Where a company is acting as a trustee of a trust, directors may be liable for a company’s breach in trust terms, acting outside the scope of its powers and where the terms of the trust limit the company from being protected against the liabilities.
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Author: Elena Rear
Email: elena.rear@faj.com.au
