Company directors have important legal responsibilities when managing a business. While companies generally provide protection from personal liability, there are circumstances where directors can become personally responsible for company debts and obligations.
Recent reforms introduced under the Treasury Laws Amendment (Combating Illegal Phoenixing) Act 2020 have increased director accountability by expanding the circumstances in which directors may face personal liability, civil penalties and criminal offences.
These changes are aimed at preventing illegal phoenix activity, protecting creditors and ensuring directors properly manage company obligations.
This article explains some of the key risks for company directors, including Director Penalty Notices (DPNs), unpaid tax liabilities, creditor-defeating transactions and restrictions on director resignations.
Can Company Directors Be Personally Liable for Company Debts?
Generally, a company is a separate legal entity from its directors and shareholders. This means directors are not automatically responsible for company debts.
However, directors may become personally liable in certain circumstances, including where they:
- Fail to comply with taxation obligations;
- Allow a company to trade while insolvent;
- Engage in transactions designed to defeat creditors; or
- Breach their duties under the Corporations Act 2001 (Cth).
Directors should ensure they understand their obligations and obtain advice early if a company is experiencing financial difficulties.
What Is a Director Penalty Notice (DPN)?
A Director Penalty Notice (DPN) is a notice issued by the Australian Taxation Office (ATO) that can make company directors personally liable for certain unpaid company tax liabilities.
Traditionally, DPNs applied to unpaid:
- Pay As You Go (PAYG) withholding amounts; and
- Superannuation Guarantee Charge (SGC) liabilities.
The reforms expanded the DPN regime to include certain unpaid:
- Goods and Services Tax (GST);
- Wine Equalisation Tax (WET); and
- Luxury Car Tax (LCT).
Further information about director obligations and DPNs is available from the Australian Taxation Office.
Can Directors Be Personally Liable for Unpaid GST?
Under the expanded DPN regime, directors may become personally liable for certain unpaid GST liabilities where the company fails to meet its reporting or payment obligations.
If a company lodges its activity statements but fails to pay the GST liability, the ATO may issue a DPN requiring directors to take action within 21 days.
Depending on the circumstances, directors may need to:
- Pay the outstanding liability;
- Appoint a voluntary administrator; or
- Place the company into liquidation.
Where a company fails to lodge required statements within the relevant timeframe, directors may face a lockdown DPN. In these circumstances, personal liability may not be avoided simply by placing the company into liquidation.
What Is Illegal Phoenix Activity?
Phoenix activity occurs when a company is deliberately shut down to avoid paying debts while a new company continues operating using the same or similar assets, management or business operations.
Illegal phoenix activity can involve:
- Transferring company assets for less than market value;
- Leaving unpaid creditors, employees or tax obligations behind;
- Moving business operations into a new entity to avoid liabilities; or
- Attempting to hide director involvement.
Illegal phoenix activity can cause significant harm to employees, creditors and the broader economy. ASIC has increased its focus on identifying and preventing these activities through stronger enforcement powers.
Further information about illegal phoenix activity is available through ASIC’s resources on illegal phoenix activity.
Creditor-Defeating Transactions
The reforms introduced stronger powers to recover transactions that unfairly prevent company assets from being available to creditors.
A creditor-defeating transaction may occur where company property is transferred:
- For less than market value;
- For less than the best price reasonably obtainable; or
- In circumstances where the transaction prevents creditors from recovering money owed to them.
ASIC or a liquidator may take steps to recover property involved in certain creditor-defeating transactions.
New Criminal Offences and Civil Penalties
The reforms introduced additional offences and penalties for directors and other parties involved in creditor-defeating transactions.
Liability may extend beyond company directors to individuals who assist, encourage or facilitate these transactions, including certain professional advisers.
However, defences may be available where transactions form part of legitimate restructuring processes, such as a deed of company arrangement or other approved restructuring process.
Changes to Director Resignations
The reforms also introduced restrictions aimed at preventing directors from avoiding responsibility by improperly resigning from companies.
Key changes include:
- Restricting backdated director resignations;
- Preventing the last remaining director from resigning unless the company is being wound up; and
- Allowing ASIC and the courts to review delayed notifications of director changes.
These measures are designed to prevent directors from attempting to distance themselves from company decisions or liabilities after problems arise.
Frequently Asked Questions About Director Liability
Can a company director be personally liable for company debts?
Yes. While directors are generally protected by the company structure, they may become personally liable in certain circumstances, including unpaid tax liabilities, insolvent trading or breaches of director duties.
What should I do if I receive a Director Penalty Notice?
A DPN should be treated urgently. Directors should obtain legal and financial advice as soon as possible to understand their options and the steps required to avoid personal liability.
Can a director resign to avoid company debts?
No. Directors cannot simply resign to avoid responsibility for company obligations. Restrictions apply to prevent improper resignations designed to avoid liability.
Legal Advice for Company Directors
Company directors facing financial difficulties, tax issues or potential insolvency risks should obtain professional advice as early as possible.
An experienced commercial dispute lawyer can help directors understand their obligations, respond to claims and assess available options.
If you are concerned about personal liability as a company director, contact Somerville Laundry Lomax for advice tailored to your circumstances.
This article provides general information only and is not intended to be legal advice. You should obtain professional advice relevant to your circumstances.