Personal Liability – Can you afford it?
1 June 2017
The benefit of being the Director of a Proprietary Limited company is limited legal liability, right? Technically, yes. In many instances, a trade creditor or secured creditor will require a personal guarantee from the Director to guarantee the company’s liability in the event the company is unable to make payment of the debt.
A Director should be aware of situations where additional personal liability may be attributed to him/her, potential exposure to creditors and what this means for their personal financial position.
Personal Liability for Insolvent Trading
The Director of a company that is wound up on the grounds of insolvency may be personally liable for damages caused by insolvent trading. If a company’s Liquidator determines that a Director has breached Section 588G of the Corporations Act in allowing a company to trade whilst insolvent, the Liquidator may quantify the damages caused as a result of the Director’s actions and seek to recover this amount from the Director personally.
A former Director of a company may also be held liable if he/she was a Director during the period the company traded whilst insolvent.
Personal Liability for Company Tax Debts
The Tax Commissioner has the ability to issue a Director with a Director’s Penalty Notice (“DPN”) in certain circumstances. A DPN effectively applies a company’s outstanding taxation liability for unpaid Superannuation Guarantee Charge (“SGC”) and Pay As You Go withholding (PAYG) to a Director personally.
A DPN issued to a Director in the following circumstances will result in personal liability to the Director that cannot be avoided:
- The company has unpaid SGC and/or PAYG debt that is older than 3 months; and
- The company failed to report its SGC and PAYG liabilities to the ATO within 3 months of the lodgement due date.
These provisions also apply to newly appointed Directors, non-executive Directors and may also apply to former Directors of a company.
A newly appointed Director can become liable for unpaid liabilities of the company that were due prior to their appointment. New Directors have 30 days from their appointment before they become liable for penalties equal to:
- All of the company’s unpaid PAYG withholding liabilities; and
- All unpaid SGC liabilities.
A newly appointed director will not become liable for the company’s PAYG and SGC debts that were due prior to their appointment if, within 30 days of their appointment, the company:
- Pays the full amount outstanding; or
- Is placed into external administration.
If you are considering a new appointment as a Director of a company, it is imperative to make enquiries prior to your appointment to ascertain if the company has any outstanding taxation lodgement or payments to avoid becoming personally liable for these debts.
These provisions also highlight the need for all directors of a company, even non-executive directors, to be vigilant and ensure that the company meets its tax reporting and payment obligations.
If you are a Director of a company or considering an appointment as a Director of a company, it is vital to ascertain the company’s financial position and history of taxation lodgements and payments to avoid becoming personally liable for any of the company’s debts.
If you are currently a Director of a company that is experiencing financial difficulty and/or is unable to meet its obligations to the ATO it is important to act immediately and proactively and seek professional advice for your business circumstances.
Taking prompt and proactive action will not only give your business the greatest chance of success, but seek to preserve your personal financial position by limiting your exposure to any potential insolvent trading claims or taxation liabilities which may apply because of a DPN.
Rodgers Reidy are highly specialised in all aspects of insolvency and reconstruction. Contact Rodgers Reidy now for a confidential discussion in relation to your specific business or individual circumstances.
1. ASIC Information Sheet 42 – Insolvency: A guide for directors
2. ATO – Director Penalty Regime – guide for Directors