Personal liability for directors when a company goes into liquidation

When a business is struggling financially and a director is considering placing their company into liquidation, a director is often concerned whether they will be held personally liable to pay the company’s debts.

Most business owners will operate their business through a company operating as Trustee of a trading trust or a company trading in its own right. This is primarily due to tax implications and to separate business risks and company debts in order to protect a directors’ personal assets should the business fail.

If a business is operated through a company, the company owns the assets of the business and is liable for any debts incurred and the director is not generally personally liable for the company’s trading debts and other liabilities. However, if both the company and the individual cannot pay their debts, as and when they fall due, then the company may need to go into liquidation and the director may need to go bankrupt.

Personal liability for debts

If the company is placed into liquidation, and the director does not become bankrupt, the company’s liquidation will only resolve the company’s obligations to its creditors and a director may become personally liable for the following debts:

• Separate personal debts – for example, personal credit cards;
• Any company debts which they personally guaranteed - if the company cannot pay the debt, the director may be legally responsible to pay under the guarantee;
• Any debts which they owe the company – for example, to repay a loan received from the company;
• Unpaid employer superannuation contributions;
• Failing to comply with a Director Penalty Notice issued by the Australian Taxation Office; and
• Any debts incurred if the company continued to trade whilst insolvent.

The Liquidator will also investigate if a claim exists against the director for:

• Failing to prevent the company from trading and incurring debt whilst insolvent; and
• Breaches of directors’ duties.

If an individual operates the business in their own name or in partnership with another individual, rather than via a company structure, then that individual will be personally liable for all the debts of the business and may become bankrupt if they are unable to pay those debts. 

If your business is in financial distress, please do not hesitate to contact us for a free, initial confidential consultation to discuss your options available.