Can I be held personally liable for my company's debts?

In Plain English

Whether you can be held personally liable for your company's debts depends on a few things. Generally, a company is considered a separate legal entity from its owners (shareholders) and managers (directors). This means the company is responsible for its own debts, not the shareholders or directors. However, there are exceptions:

  1. Director's Liability for Insolvent Trading: If you're a director and the company incurs debts while it's insolvent (unable to pay its debts), or becomes insolvent by incurring that debt, you could be held personally liable. However, there are defenses available, such as if you had no reason to suspect the company was insolvent or if you took steps to prevent the debt from being incurred.
  2. Fraudulent Activities: If the company engages in fraudulent activities with the intent to defraud creditors, and you were knowingly involved, you could be held personally liable.
  3. Personal Guarantees: If you've provided a personal guarantee for the company's debts (like a loan), you can be held personally liable if the company fails to pay.
  4. Breach of Director's Duties: A director of a company may be liable to compensate the company for any losses the company suffers from a breach of certain of the director’s duties to the company.
  5. Tax-Related Liabilities: As a liquidator or receiver, you can be held personally liable for a company's tax debts in certain circumstances.
  6. Creditor-defeating dispositions: As an officer of a company, you must not engage in conduct that results in the company making a creditor-defeating disposition of property of the company, if the company is insolvent, or becomes insolvent because of the disposition.

Also, keep in mind that during the COVID-19 period, there were temporary reliefs regarding director's liability for insolvent trading under certain conditions.

Detailed Explanation

Several pieces of legislation address the potential for personal liability for company debts:

  1. Director's Liability for Insolvent Trading:
    • The Corporations Act 2001 outlines scenarios where directors can be held personally liable for company debts if the company trades while insolvent. Section 588G states that a director can be liable if the company incurs a debt while insolvent, or becomes insolvent by incurring that debt, and the director fails to prevent it. There are defenses available under section 588H, such as if the director had reasonable grounds to expect the company was solvent, or if they relied on a competent person providing information about solvency.
    • Section 588M allows creditors to recover compensation from a director who has contravened section 588G.
    • The Corporate Law Reform Act 1992 also amended the Corporations Law to include provisions related to director's duties and potential liabilities when a company is insolvent.
    • During the COVID-19 period, section 645A of the Companies Act 1985 (NI) provided temporary relief for directors from liability for insolvent trading under certain conditions.
  2. Fraudulent Activities:
    • Section 645(5) of the Companies Act 1985 (NI) states that if a company acts with intent to defraud creditors, a person knowingly concerned in that act can be guilty of an offence and potentially held liable.
    • Section 588G(6) of the Corporations Act 2001 also addresses fraudulent activities, stating that a person knowingly concerned in an act to defraud creditors contravenes the subsection.
  3. Personal Guarantees:
    • As highlighted in the overview of the Corporations Act 2001, directors may be asked to provide personal guarantees for company liabilities (1.4 Director’s liability as guarantor/security over personal assets). In such cases, the director is personally liable under the terms of the guarantee.
  4. Breach of Director's Duties:
    • Section 1.3 of the overview of the Corporations Act 2001 states that a director of a company may be liable to compensate the company for any losses the company suffers from a breach of certain of the director’s duties to the company.
  5. Tax-Related Liabilities:
    • The Taxation Administration Act 1953 outlines the obligations and potential liabilities of liquidators and receivers concerning a company's tax debts. Section 260-45 deals with liquidators, and section 260-75 deals with receivers. If a liquidator or receiver fails to comply with their obligations under these sections, they can be held personally liable for the company's outstanding tax-related liabilities.
    • Division 269 of the Taxation Administration Act 1953 discusses director penalties, where directors can become personally liable for a company's unpaid PAYG withholding, GST, and superannuation guarantee charge.
  6. Creditor-defeating dispositions:
    • Section 588GAB of the Corporations Act 2001 states that an officer of a company must not engage in conduct that results in the company making a creditor-defeating disposition of property of the company, if the company is insolvent, or becomes insolvent because of the disposition.

It's important to note that the Corporations Act 2001 emphasizes that a company has a separate legal existence from its shareholders and directors (1.1 Separate legal existence). However, the provisions outlined above create exceptions to this principle in certain circumstances.