Personal guarantees
Where a director has signed a personal guarantee of the company's debt, the guarantee can be called on if the company fails to pay.
Explainer
When directors are personally liable for company debts
The corporate veil protects company directors from personal liability for most commercial debts — but there are important exceptions. Understanding when a director can be pursued personally matters to any creditor facing an insolvent debtor company.
The limited liability of companies is a foundational principle of Australian commercial law — a company's debts are the company's debts, not the directors'. But that protection has limits, and creditors who understand those limits can sometimes recover from directors personally when the company itself cannot pay.
The main circumstances where director personal liability arises are personal guarantees, insolvent trading, phoenix activity (where director involvement in a new entity may give rise to liability), and ATO director penalty notices for unpaid tax obligations.
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Insolvent trading
Directors who allow a company to incur debts when it is insolvent can be personally liable to the creditors whose debts were incurred while the company was insolvent.
Phoenix activity
Directors who transfer business assets to a new entity to defeat creditors may face personal liability and criminal penalties.
Director guarantee — the most direct path
Where a director has signed a guarantee, recovery from the company's failure does not have to be the end of the matter.
Common questions
Frequently asked questions
How do I know if a director has guaranteed the company's debt?
A personal guarantee must be in writing and signed by the guarantor. If you took a guarantee at the time of extending credit, you hold the key document. If you did not, there is generally no guarantee to call on.
What is insolvent trading and how does it help me as a creditor?
Insolvent trading occurs when a director allows a company to incur debts it cannot pay. The Corporations Act provides a cause of action against the director, though the threshold for proving it is high and pursuing it through a liquidator adds another layer of cost.
Can I pursue a director for an ATO debt?
Director penalty notices are the ATO's mechanism — they are not available to ordinary commercial creditors. Commercial creditors cannot access the DPN regime.
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Director guarantee to call on?
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