Can Directors or Shareholders be Liable for Company Debts?

One of the most common questions we’re asked by directors of our SME clients is “am I personally liable for debts of my company?”

It’s important for both directors and shareholders to understand their potential exposure when it comes to company debts.

When can company debts become personal debts?

As a general rule, debts incurred by a company are owed by the company itself, not by its directors personally.

There are, however, a few exceptions to this rule:

  1. Where the directors have signed personal guarantees in respect of specific debts of the company. Typically this occurs when financial institutions or large suppliers extend a line of credit to the company (for example an overdraft facility or a high value supply agreement).
  2. Where the company has failed to meet its PAYG and/or superannuation guarantee obligations. In these circumstances, the ATO has the power to issue a Directors Penalty Notice (“DPN”) which effectively converts the company’s liability in respect of any unpaid amounts into the personal liability of the directors.
  3. Where the company has traded while insolvent. Directors have a positive duty to ensure that the company does not incur debts while insolvent. In the event that the company is wound up in insolvency, a liquidator is empowered to recover from the directors personally an amount equal to the amount of any debts incurred by the company while insolvent where those debts remain outstanding.

Can a shareholder be liable for the debts of the company?

No, if the company is a limited liability company (that is, a “Pty Ltd” or “Ltd” company), a shareholder is only liable to the company for any amount unpaid in respect of the shareholder’s shares.

Directors Duties

Under the Corporations Act 2001 (Cth), directors are subject to a number of duties in carrying out their role as director, including the duty to:

  • act in good faith;
  • act in the best interests of the company;
  • avoid conflicts between the interests of the company and the director’s interests;
  • act honestly;
  • exercise care and diligence; and
  • prevent the company trading while it is unable to pay its debts (insolvent trading).

Failure to perform these duties may result in the director being:

  • liable to compensate the company or others for loss or damage;
  • guilty of a criminal offence;
  • liable to pay to the Commonwealth an amount of up to $200,000; or
  • prohibited from managing a corporation.

If you would like further information about anything discussed in this article, please contact our office on (03) 8692 7520