Running a business, whether large, small or a family business isn’t easy.
You’re constantly balancing cash flow, staff, suppliers, and pressure from creditors coinciding with the eternal goal to grow. Sometimes due to extenuating circumstances; whether that be market down swings, international relations or family dysfunction, the company begins to face financial pressures. At that point, the question begins to form, ‘Will I, as a director, be personally liable to pay my company’s debts?’
It’s a question that keeps many directors awake at night, and for good reason. Under Corporations law, there are circumstances where directors can be held personally liable for company debts. Understanding these situations early can make the difference between protecting your family assets and facing personal bankruptcy.
When the line between company and director blurs
Pursuant to Corporations law, your company is considered a separate individual legal entity, however, this protection is not absolute. Under the principle known as ‘piercing the corporate veil’ the Court may hold directors personally liable for the company’s debts and actions, disregarding the usual limited liability that a corporate structure provides.
When a court ‘pierces the corporate veil,’ it is saying, in effect:
We will not be fooled by form; we will look to the substance of who is really acting, controlling, or benefiting and tear away the legal costume of the company so the law can deal directly with the humans underneath.
You must agree, it is a good metaphor!
Under the Corporations Act 2001 (Cth), directors must act in good faith, exercise care and diligence, and avoid insolvent trading. If those duties are breached, the corporate veil can be pierced, and you may be personally exposed.
A director’s personal liability for company debt usually arises in the following circumstances:
- Insolvent trading – if the company trades in circumstances where it cannot meet its debts as and when they are due and payable, directors can be personally liable for debts it incurs in those circumstances.
- Director penalties for unpaid taxes – the ATO can issue a Director Penalty Notice (DPN) making you personally responsible for unpaid PAYG withholding, GST, and Superannuation. DPNs are rather frightening to receive but we have some tips for challenging a DPN here.
- Personal guarantees – many suppliers, lenders and landlords require personal / director guarantees. Directors usually sign guarantees when seeking finance, leasing property, or entering supplier agreements. These create direct personal liability if the company cannot pay its debts in accordance with the terms of the guarantee.
As a side note, guarantees signed by directors need to be considered in their estate planning. After a director’s death personal guarantees must be quickly identified by their executors. If a director has signed a guarantee that binds his or her deceased estate, an executor may need to retain or set aside estate funds to cover a potential future claim, rather than distribute the estate immediately. If an executor distributes the estate without making provision for that risk and the guarantee is later enforced, the executor may be personally liable.
If you’re concerned about potential liability as a director, you need a clear plan to regain control. Call us on 1300 654 590 or email us for tailored advice and action to limit your liability and protect what you’ve worked so hard to build.
Steps to protect yourself
Understand your company’s financial position
You can’t manage what you don’t measure. Review your balance sheet, cash flow, and creditor position regularly. If you’re unsure whether your company is solvent, ask your accountant or insolvency practitioner to assess your situation.
Get professional advice early
Early advice is often the difference between your company dying or thriving. The sooner you speak to an insolvency lawyer or financial advisor, the more options you’ll have, including restructuring, voluntary administration, or safe harbour protections.
How we can help
If you are a director facing financial pressure, early, practical advice can make all the difference. We work with directors of private, family-owned and SME businesses to clearly identify where personal risk arises – and just as importantly, where it does not. We can review your company’s solvency position, assess exposure under insolvent trading laws, Director Penalty Notices and personal guarantees, and guide you through available protections such as safe harbour and restructuring options. Our focus is on helping you make informed decisions, reduce personal risk, and put a clear, defensible plan in place so you can move forward with confidence rather than uncertainty.
Please contact us on 1300 654 590 or email us to discuss your situation.
