Director liability. Am I exposed to risk as a director of a company?

Yes, as a director of a company in Australia, you are exposed to various personal risks. Under Australian law, specifically the Corporations Act 2001 (Cth) (Corporations Act), you have specific duties and obligations, including when your company is facing financial difficulties. Failing to comply with these duties can lead to a number of legal and financial consequences.

When do directors become personally liable?

Be aware of these three key personal liabilities of directors under the Corporations Act:

1. Directors’ personal liability for insolvent trading

Under section 588G of the Corporations Act, as a director, you have a duty to prevent your company from trading while insolvent. If for example, you are found to have allowed your company to incur debts when it is insolvent, you could be held personally liable and the court may make orders requiring you to pay compensation or incur certain civil and/or criminal penalties.

2. Directors breaching fiduciary duties

Directors have fiduciary duties to act in the best interests of their company and its creditors. These duties are especially relevant if a company is approaching insolvency. Breaching a director’s duty puts you at risk of being held personally liable for damages, fines and/or prosecution depending upon the severity of the breach.

3. Director’s personal liability for voidable transactions

As a director, it’s important that you and your company don’t engage in any voidable transactions. This is important at any time, but particularly in the period surrounding insolvency. This is because an appointed liquidator can make a claim and seek orders to claw-back any voidable transactions for which you (as a director) could be liable. Under the Corporations Act, some of the voidable transactions that are often found to unfairly favour certain creditors over others, include:

• unreasonable director-related transactions (section 588FDA) – for example, when a company pays an excessive salary or bonus payment to one of its directors shortly before going into liquidation;
• unfair preferences (section 588FA) – for example, when a company facing liquidation unfairly prioritises paying one supplier’s invoices over others; and
• uncommercial transactions (section 588FB) – for example, when a company sells an asset to a related party for a price well below market value prior to its liquidation.

Can a former director be liable for company debts?

Former directors can be held liable for company debts in a range of circumstances. Generally speaking, a former director may be held liable for a company debt if they breached their duties as a director, or if they acted dishonestly in relation to the debt that was incurred. A common scenario where a director can be held personally liable for a company debt includes tax debt. A former director can receive a Director Penalty Notice (DPN) from the Australian Taxation Office (ATO) after they have resigned to recover unpaid tax debts (including PAYG withholding, GST and superannuation) incurred during the director’s time in office. If this happens and the new managers of the company become uncooperative, directors can find themselves in a difficult situation. In this situation, a former director could have options for taking action to avoid personal liability including:

• obtaining ‘standing’ under the Corporations Act by taking steps to become a director, creditor or shareholder; and
• making an urgent application for the company to be wound up with sufficient grounds.

How long can a director be liable after resignation?

A director can remain liable for any personal obligations under the Corporations Act that arose while that director was serving as a director, even after their resignation. The duration of the liability will depend on the specific type of claim that arises, as well as the relevant statutory limits.

If a director has provided a personal guarantee on behalf of the company, they will typically remain liable for those debts after resignation until the debt is either repaid, or the guarantee is formally released.

If you are concerned that you may be at risk as a director in relation to a company’s financial difficulties, get in touch with our specialised business lawyers to discuss your options. At H+A Legal we have extensive experience acting for both liquidators and directors in relation to personal liability stemming from breaches, insolvency and voidable transactions. We provide you with practical, real-world options whilst working towards the most commercially sound resolution possible.