Directors personal liability – insolvent trading


A part of our fast facts for Directors series of articles

People generally use a company to run business for a number of reasons, but generally either for tax, or to protect their personal assets.

However, directors of a company can be personally liable for some of the things the business does. Being exposed in an area of personal liability means you are not getting the protection you hoped from your company and your house, and now freedom, could be at risk. You need to know your obligations as a director and be careful to not expose yourself to personal liability.

Insolvent trading sounds very serious (and it is). But because it sounds so serious, it can be hard for directors to actually think about what it means. If you trade your company while it is insolvent, the directors can be personally liable for the debts of the business.

So . . . what does it mean? Technically a company is insolvent if it cannot pay its debts as and when they fall due.

What it can be:

  • Missing superannuation guarantee payments;
  • Falling further and further behind on bill payments;
  • It continues to incur debt even though it probably won’t be able to service the debt.

What it isn’t:

  • Temporary illiquidity – that is, just a temporary shortfall in working fund (for example, while the company waits for payment from a big contract);
  • Where the directors are happy to, can, and are, supporting the repayments for the debt of the company;
  • Having debt which could not be paid back today, right now, but is say borrowed over 10 years, and where the repayments can be made

Important: Superannuation guarantee payments for workers are really really important. Not paying them can be a key indicator a company is insolvent, and some of the processes a company can go through to try and trade out of their insolvency – get past it, are not available where there are outstanding superannuation guarantee payments outstanding. See our previous article about tough new penalties, including jail time for failure to make superannuation guarantee payments.