A Pty Limited or Limited company is essentially an entity unto itself, meaning that any assets or debts belong to the company. However, there are some instances in which a company director can become personally liable for company debts:
1. Personal guarantee
2. Insolvent Trading
3. ATO debt
When you sign a personal guarantee with a creditor or trade supplier, you are promising them that you will personally pay the debt if, for some reason or another, the company is unable to. But more importantly, you are making yourself legally liable for the company debt. Some personal guarantees also include an authorisation to place a caveat on your house, meaning that the creditor is entitled to receive proceeds should you sell your house (after the mortgagee and other selling costs have been paid in full).
If the company does not pay its debts and you have signed a personal guarantee, those creditors holding a personal guarantee will be able to demand payment from you as an individual. They do not have to wait until your company liquidation is complete to demand payment. Thefact that your company has gone into liquidation is a trigger to demand payment under the guarantee. You would be best advised to come to an arrangement with any creditor holding a personal guarantee immediately after your company is placed into liquidation, so that you do not place yourself at risk of legal action being taken against you personally.
A company director can be found guilty of insolvent trading if it can be proven that:
- 1.the company incurred a debt whilst it was insolvent;
- 2.the director was aware, or should have been aware, that the company was insolvent at the time; and
- 3.the director failed to prevent the company from incurring the debt.
If the court finds a company director guilty of incurring debt whilst insolvent, they can become subject to penalties including:
- 1.Civil penalties – the company director could be ordered by the court to personally pay a penalty of up to $200,000;
- 2.Compensation proceedings – the company director could become personally liable, by order of the court, for a compensation payment to the value of debts incurred whilst the company was insolvent;
- 3.Criminal charges – the company director could be referred to the Director of Public Prosecutions and become subject to a criminal prosecution.
If the company fails to lodge its Business Activity Statements (BAS) with the ATO within 3 months of their due dates, any company directors will become personally liable for any unpaid tax deducted from employee’s wages (PAYG). They will also be liable for any unpaid superannuation contributions.
Note: a company director can not become personally liable for any unpaid GST.
If you are acting as director of a company that is potentially insolvent and/or facing liquidation, you should contact us immediately to get advice on any debts that you may become personally liable for. We are available 24/7 on 1800 003 883.