Here’s a guide to when the most common forms of personal liability might crop up for company directors:
Personal Guarantees
While each guarantee is different, personal guarantees are generally continuing guarantees and have no time limit stated in the guarantee. In practice, they’ll be limited to 6 years by Law.
A creditor can only pursue a director under a personal guarantee when the principal contract is in default. Liquidation may accelerate this process. A creditor is not obliged to await the outcome of the company’s liquidation to pursue a guarantee – they can pursue the debt immediately through enforcing the personal guarantee given by the director, regardless of any proposed distribution from the liquidation.
On the other hand, in circ*mstances where the company is placed into voluntary administration, the creditor cannot exercise or seek to enforce a personal guarantee given by the company’s directors or spouse, de-facto or relative of a director whilst the company remains in voluntary administration. Once the voluntary administration is complete, the creditor has the right to pursue any guarantees that it obtained from the director of the company or any related party as the case may be.
Ceasing to act as a director of a company does not terminate a guarantee. You will need to either pay the amount due under the guarantee or negotiate with the creditor to have the guarantee terminated.
On practical level, not all creditors will pursue a director under a personal guarantee even where the company has defaulted. Many creditors will use the guarantee as a negotiating tool but will be reluctant to actually take a legal action against a director. For example, large retail landlords will not pursue a director under a personal guarantee provided the director was cooperative in exit from the premises.
Trading Whilst Insolvent
Insolvent trading works like this:
When a company enters liquidation, it provides its books and records to the liquidator. The liquidator goes through those records and decides a date where the company first became insolvent. If the records show any debts incurred after that date, the directors can be held personally liable for those debts.
This decision is made once the liquidation has progressed a little, you are unlikely to receive a demand for insolvent trading debt in the first month of the liquidation, but it can happen at any stage. You do not know if you are in the clear, until you see the liquidator has lodged their final return for the liquidation.
Loans and Drawings
Like Insolvent Trading, a demand to repay a loan from the company or drawings arises from the investigation phase of the liquidation where the liquidator looks through all collected books and records. A director’s loan or drawings stand out a little more than insolvent trading, so you may receive a demand to repay a loan or drawings at any stage once the liquidator has looked at company records. Again, you can’t be sure you are in the clear until you see the liquidators final return has been lodged.
Company Credit Cards
Credit Cards nearly always carry a personal guarantee. Even if they are in the company name, whomever signed up usually provides the guarantee. Banks are probably a little more likely to wait to see the outcome of a liquidation (but don’t have to – see personal guarantees above) before enforcing a guarantee.
Company Tax Debts & Director Penalty Notices
Company Directors can become personally liable for company tax debts through the Australian Tax Office’s (ATO) Director Penalty Notice (DPN) regime.
Under a DPN, the ATO can make a director personally liable for unpaid Pay As you Go withholding, Superannuation and GST.
The timeframes for when and how they can send a DPN depends on how current tax (and super) reporting has been over the company’s lifespan.
The rule is if a debt was not reported or reported more than 3 months late you can be pursued at any stage, even if you put the company into liquidation.
If the debt was properly reported but remains unpaid, then the ATO must issue a Director Penalty Notice that gives 21 days’ notice of pending liability. If the debt is settled or the company placed into liquidation or administration before the 21 days expire, the director avoids liability.
Amendments affect the reporting date by the way, if a debt was reported on time, but that return was amended outside the 3-month grace window, it is considered to have been reported late.
Not many people know you must report unpaid Superannuation to the ATO. If a company cannot pay Superannuation when it is due, they must submit a Superannuation Guarantee Charge Statement to the ATO within 3 months of the due payment date. Failure to do this will cause the ATO to classify the debt as unreported and allow them to enforce personal liability at any time as described above.
