I’m a Director. Am I Responsible for My Company Debts?

Summary

• Company debts are amounts a business owes to others, such as suppliers, lenders, employees or tax authorities.
• Common examples include unpaid invoices, loans, wages, rent and taxes like VAT or corporation tax.
• In a company structure, these debts belong to the company itself, not its directors or shareholders in most cases.
• This guide explains company debts for Australian business owners, including what they are and how liability works in practice.
• It is prepared by LegalVision’s business lawyers, a commercial law firm that specialises in advising clients on corporate and insolvency matters.

Tips for Businesses

Keep accurate financial records and monitor cash flow closely to manage debts early. Pay creditors on time where possible and communicate if issues arise. Avoid taking on debt your business cannot service, and seek advice promptly if you risk insolvency to reduce personal and commercial exposure.

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On this page

• Liability as a Company Director
• Liability Under a Guarantee
• Trading While the Company is Insolvent
• Case Study
• Defences
• Illegal Conduct
• Liability Under Statutory Regimes
• Managing Your Risk as a Director
• Key Takeaways
• Frequently Asked Questions

A company debt arises when a business owes money to another party, typically under a contract, loan, or unpaid invoice, and is legally required to repay that amount. If the company fails to pay its debts when they fall due, creditors may take formal action to recover the money, including court proceedings, statutory demands, or insolvency processes such as liquidation.   This article explains what company debts are, the risks of non-payment, and the legal options available to creditors and businesses.

Liability as a Company Director

Before consenting to act as a director, it is essential to understand how long you owe obligations to the company. Once a company is registered, the rights and liabilities of each director will continue. They will continue until, and in some circumstances after, that director resigns and/or the company has finished trading or has been deregistered. Therefore, keep this in mind in light of any debts incurred by your company when acting as a director.

Liability Under a Guarantee

As a director, you can be personally liable if you have signed a director’s guarantee. This is also the case if you have provided security over your personal assets for:

• loan;
• credit facility; or
• other agreement in the interest of your company.

A director’s guarantee operates in the same way any other personal guarantee does. You personally agree to pay a company debt if the company defaults on its obligation to do so.

It is important to note a guarantee against a director cannot be enforced without leave of the court during a period of voluntary administration. The purpose of voluntary administration is to investigate the company’s affairs and decide what strategy is in the best interests of the company’s creditors. If a guarantee was allowed to be immediately enforced during this process, the purpose of voluntary administration would not be achieved.

However, the voluntary administration process does not halt proceedings already on foot. Nor does it stop a creditor from enforcing a judgment that the court has already handed down.

Trading While the Company is Insolvent

You may be personally responsible for losses that your company incurs due to a breach of your directors’ duties in the Corporations Act 2001 (Cth). For instance, if you have caused or permitted the company to incur debts after it has become insolvent. Specifically, this is a breach of the duty not to trade while the company is insolvent. Breaches of the directors’ duties can lead to civil and criminal penalties under the Corporations Act.

To be liable for insolvent trading, there must be reasonable grounds for you, as a director, to have suspected the company is insolvent or would become insolvent as a result of incurring the debt.

Directors' Duties Complete Guide

If you are a company director, complying with directors’ duties are core to adhering to corporate governance laws.
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Case Study

An example of a company director being personally liable for insolvent trading is ASIC v Edwards. Murray River Pty Ltd (MRL) entered into an agreement for building works with Colin Joss & Co Pty Ltd (CJC). MRL was insolvent when CJC performed the building works for MRL.

The court found reasonable grounds for MRL’s director to suspect that the company was insolvent during the period in which CJC carried out the works. Ultimately, MRL disadvantaged CJC as they did not have the money to pay for CJC’s work. Therefore, the director was disqualified from managing corporations for 10 years for breaching his duty under the Corporations Act. 

Defences

There are defences to insolvent trading. These include:

• whether you had reasonable grounds to expect the company was solvent at the time the company incurred the debt and would continue to be solvent;
• whether you took reasonable steps to prevent the company from incurring the debt; and
• if you did not participate in the company’s management at the time the company incurred the debt due to illness or another legitimate reason.

Illegal Conduct

Engaging in Phoenix Activity

The term ‘illegal phoenix activity’ refers to fraudulent activity which involves a director transferring company assets to another entity and continuing to operate the business, and then putting the old company into administration or liquidation to avoid paying creditors or employees.

If you engage in illegal phoenix activity, you can be personally liable for a breach of the director’s duties. You may then be disqualified from managing corporations in the future.

Enforcing Compliance

The introduction of the Director Identification Number (DIN) aims to combat illegal phoenixing activity. The Australian Government is taking additional steps to ensure all Australian company directors are responsible for their actions. The tracking system under the DIN regime means that each director must apply for a unique DIN, which they will keep permanently. Therefore, if you act as a director of multiple companies, it will be easy to identify you across those companies.

Liability Under Statutory Regimes

A statutory regime includes written laws that formally detail your legal obligations and consequences for non-compliance. Specifically, there are some statutory regimes under which a director can be personally liable for a debt. This can be either directly or as an accessory to an infringement of statute.

For example, as a director, you have personal liability for unpaid ‘Pay As You Go’ (PAYG) tax or Superannuation Guarantee Charge (SGC) amounts the company has not paid under the Australian Tax Office’s Director Penalty Regime.

Managing Your Risk as a Director

As a director, you can take several practical steps towards minimising your risk of personal liability whilst performing your role as a director. The most common ways to reduce risk as a director are as follows:

Implementing these strategies will provide you with the basis for protecting yourself as a director while fulfilling your duties as a director effectively and responsibly in the company’s best interests. For further information, LegalVision has produced a Directors Duties Guide, which you can access for free, that sets out the roles and responsibilities of corporate directors.

Key Takeaways

As a director, you can be personally liable for your company’s debts when things go wrong. It is important to remember that your liability may be ongoing and that you must always fulfil your duties as company director. Likewise, you must remain financially diligent and avoid trading while insolvent. Importantly, never engage in illegal conduct.

If you need help with your corporate governance obligations, our experienced business lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.

Frequently Asked Questions