Director Personal Liability
Various activities and debts may penetrate the corporate veil and leave directors personally liable, which can potentially result in a company liquidation extending into personal bankruptcy.
Regardless of whether or not directors have taken due care and remedial action to resolve financial problems of the company, there are various liabilities that may initially be company debts but ultimately result in personal liability. These include but are not limited to:
Personal guarantees on company debts/credit
For claims to be made by creditors under personal guarantees they do not require a company to be in liquidation. When a personal guarantee is in place they are a secured creditor, secured by personal guarantee. The creditor may exercise any provision that falls within the guarantee initially agreed upon by both parties.
Void/Unreasonable director related transactions
These claims are also made by the liquidator when the company is in liquidation.
Insolvent Trading claims are made by either liquidators or creditors. Through investigation into the financial affairs of a company whilst in liquidation, the liquidator may discover evidence of insolvent trading (see below). The director, if found guilty of insolvent trading, then becomes personally liable for any shortfalls to creditors that the liquidation of the company does not cover.
Loss of employee entitlements
Employees are a priority creditor, as termination of their employment will terminate their source of income in most cases.
Unpaid Taxation/Superannuation debts
Any unpaid taxation or superannuation debts are liabilities and may potentially penetrate all protection structured around the directors (e.g. discretionary trusts, etc)
If a company can pay its debts when and as they fall due then they are solvent, and if not they are by definition insolvent. It is the responsibility of the director to have full awareness of their financial position and to have clear knowledge and reasonable grounds to suspect whether or not the company is trading whilst insolvent.
If a company is found to be trading whilst insolvent, the director/s will be held personally liable for the shortfalls of debt that the company is unable to pay. This liability usually falls upon the director; however, if there are parties carrying out directive duties without being officially appointed as a director then liability also rests with them. These are called “De Facto Directors” or “Shadow Directors”.