When company directors breach the law they can be personally liable for the company’s debts and regulatory action can be taken against them.
In Australia, the agency responsible for enforcing such breaches is the Australian Securities and Investments Commission (ASIC).
ASIC outlines the key liabilities company directors need to be aware of when things go wrong.
How long are directors liable for a company?
Generally, until the company is deregistered by ASIC.
However, in some instances obligations as a director may continue even after the company has ceased trading and has been deregistered.
Are directors liable for company debts?
They may be, if the company has become insolvent and can’t repay debts or pay trade suppliers and other creditors on time.
If you allow the company to trade while insolvent, you may be acting illegally and be in breach of civil and criminal provisions of the Corporations Act 2001.
Other potential liabilities faced by company directors include:
- Liability for company losses – if a breach of duties as director has caused the loss.
- Liability for company tax debt – this is typically enforced by the ATO through the Director Penalty Regime.
What if I used my home to guarantee a company loan?
You may have secured a loan by providing a personal guarantee that your company will be able to repay it, and specifying your home as a form of security.
If the loan can’t be repaid, you could lose your home.
Debts incurred by companies acting as trustees
If your company is acting as a trustee you may become personally responsible for liabilities incurred by the company for one of the following reasons:
- A breach of trust by the company, if the trustee company breaches the terms of the trust.
- The trustee company acts outside its scope of powers as a trustee.
- The terms of the trust deny or limit the trustee company’s rights to be indemnified against the liabilities.
Illegal phoenix activity
In some cases, a new company is created to continue the business of an existing company that has been deliberately liquidated to avoid paying outstanding debts. This is called illegal phoenix activity.
ASIC is a member of the Phoenix Taskforce, which prosecutes those who engage in or facilitate illegal phoenix activity.
An individual who has engaged in this activity may be disqualified from managing corporations for up to five years.
Consequences of failing to perform director duties
If you fail to perform your duties as a director, you may:
- Be guilty of a criminal offence with a penalty of up to a maximum of $200,000, or imprisonment for up to five years, or both.
- Have contravened a civil penalty provision (and the court may order you to pay to the Commonwealth up to $200,000).
- Be personally liable to compensate the company or others for any loss or damage they suffer.
- Be prohibited from managing a company.
Are shareholders liable for company debts?
No.
However, a director who is also a shareholder may become personally liable under certain circumstances. This has nothing to do with their capacity as a shareholder.
Conclusion
If you are the director of a company, there is a very real possibility that you could be held personally liable for company debts, losses or tax debts if things go wrong.
Penalties do not only apply for white collar crimes such as illegal phoenix activity. You could face prison or large fines for failing to adequately perform your duties as director, breaching trust, or allowing a company to continue trading while insolvent.
