Reading time: 4 minutes

In most cases, you will not be liable. However, there are some exceptions to that rule. As most owners of companies know, one of the reasons to operate through a company is to benefit from the generally lower company tax rate. Outside of the tax benefit, the other most significant factor is what we business lawyers refer to as the “corporate veil” or “veil of incorporation”. If a director has not upheld his or her duties as a director, he or she may be personally liable.

What Is the Veil of Incorporation?

The phrase means that a company has a separate legal identity from its directors. The law regards a company as its own legal person (or entity). This refers to the company’s capacity to:

  • enter into a contact;
  • open bank accounts; and
  • be sued.

This is where the ‘veil’ metaphor comes into play. Because the company is a person and can be sued, the suing action will generally stop once it gets to the company. The directors are protected from the suing action because they are ‘behind’ the company. The ‘veil’ that is the company, in effect, protects them. Therefore, any liabilities that result out of the suing action are borne only by the company. You, as a director, are not personally liable. Your personal assets will, generally speaking, not be available to meet any claim.

How Do You Pierce the Veil?

Sometimes, however, that “veil” can be “pierced”. This occurs when its directors have:

  • acted illegally; or
  • otherwise assumed personal liability for a certain debt or contract.

A small business lawyer will be able to look at the circumstances in place when the relevant contract or relationship was formed to help determine if there is any potential liability.

Generally, when a company being sued loses, the company will become liable for any order of damages and costs and the matter will come to an end. The company will have to pay whatever the amount is and the matter is finished.

Sometimes, however, the original suit may occur because a director has done something illegal or otherwise assume personal liability for a particular debt.

A very common example is continuing to trade and acquire additional debt in circumstances where the director knows that the company will never be able to pay the money back. This is referred to as ‘trading while insolvent’.

Alternatively, a director may have made certain promises or representations that form, at law, a personal guarantee. In these sorts of situations, there can be an order made to ‘pierce the veil’. In this case, the directors may be personally liable.

Phoenix Companies

Another common reason for piercing the veil has to do with tax. Some companies try to avoid tax by declaring bankruptcy and winding up. This means that the company will not have to pay the taxes that it owes. The company then reopens with a new name and a clean slate. This is referred to as a ‘Phoenix Company’. Whether the new company is a Phoenix Company will depend on a number of subjective factors, mostly relating to the similarities between the previous entity and the new one. To prevent the incorporation of Phoenix companies, the law allows the tax office to go directly after the directors for the tax bill.

Key Takeaways

The fact that your company is facing a lawsuit does not necessarily mean you will lose your house. The company is liable, not you. The only time that you could be liable yourself is if, as a director of the company, you did something that allows the suing party to ‘pierce the corporate veil’. If you need advice on what you can and cannot do as a director, contact LegalVision’s business lawyers on 1300 544 755 or fill out the form on this page.


Redundancies and Restructuring: Understanding Your Employer Obligations

Thursday 7 July | 11:00 - 11:45am

If you plan on making a role redundant, it is crucial that you understand your employer obligations. Our free webinar will explain.
Register Now

How to Sponsor Foreign Workers For Your Tech Business

Wednesday 13 July | 11:00 - 11:45am

Need web3 talent for your tech business? Consider sponsoring workers from overseas. Join our free webinar to learn more.
Register Now

Advertising 101: Social Media, Influencers and the Law

Thursday 21 July | 11:00 - 11:45am

Learn how to promote your business on social media without breaking the law. Register for our free webinar today.
Register Now

Structuring for Certainty in Uncertain Times

Tuesday 26 July | 12:00 - 12:45pm

Learn how to structure to weather storm and ensure you can take advantage of the “green shoots” opportunities arising on the other side of a recession.
Register Now

Playing for the Prize: How to Run Trade Promotions

Thursday 28 July | 11:00 - 11:45am

Running a promotion with a prize? Your business has specific trade promotion obligations. Join our free webinar to learn more.
Register Now

Web3 Essentials: Understanding SAFT Agreements

Tuesday 2 August | 11:00 - 11:45am

Learn how SAFT Agreements can help your Web3 business when raising capital. Register today for our free webinar.
Register Now

Understanding Your Annual Franchise Update Obligations

Wednesday 3 August | 11:00 - 11:45am

Franchisors must meet annual reporting obligations each October. Understand your legal requirements by registering for our free webinar today.
Register Now

Legal Essentials for Product Manufacturers

Thursday 11 August | 11:00 - 11:45am

As a product manufacturer, do you know your legal obligations if there is a product recall? Join our free webinar to learn more.
Register Now

About LegalVision: LegalVision is a commercial law firm that provides businesses with affordable and ongoing legal assistance through our industry-first membership.

By becoming a member, you'll have an experienced legal team ready to answer your questions, draft and review your contracts, and resolve your disputes. All the legal assistance your business needs, for a low monthly fee.

Learn more about our membership

Need Legal Help? Submit an Enquiry

If you would like to get in touch with our team and learn more about how our membership can help your business, fill out the form below.

Our Awards

  • 2020 Innovation Award 2020 Excellence in Technology & Innovation Finalist – Australasian Law Awards
  • 2020 Employer of Choice Award 2020 Employer of Choice Winner – Australasian Lawyer
  • 2020 Financial Times Award 2021 Fastest Growing Law Firm - Financial Times APAC 500
  • 2020 AFR Fast 100 List - Australian Financial Review
  • 2021 Law Firm of the Year Award 2021 Law Firm of the Year - Australasian Law Awards
  • 2022 Law Firm of the Year Winner 2022 Law Firm of the Year - Australasian Law Awards