Directors of Australian companies enjoy the protection of limited liability — a company's debts are the company's debts, not the directors' personal debts. This protection is not absolute. Several mechanisms in the Corporations Act 2001 (Cth) and in tax legislation make directors personally liable in specific circumstances. Understanding when those circumstances arise is important for any director of a company in financial difficulty.
Insolvent trading under section 588G
Section 588G of the Corporations Act makes a director liable for debts incurred by the company while it is insolvent, if the director knew or ought to have known that the company was insolvent (or would become insolvent by incurring the debt) and failed to prevent the debt from being incurred. The liability is civil — the director is liable to compensate the company (and through it, creditors) for the amount of the debt.
A liquidator can pursue insolvent trading claims against all directors — including non-executive directors and directors who were not involved in the decision to incur the debt. The knowledge test can be met by evidence that the director had, or ought to have had, access to information showing the company's insolvency. Ignorance is not a complete defence; a director who takes no interest in the company's finances is not necessarily protected.
Safe harbour
Since 2017, a director who takes steps to restructure a company in financial difficulty may be able to rely on the "safe harbour" under section 588GA. The safe harbour protects directors from insolvent trading liability where they develop and implement a course of action reasonably likely to produce a better outcome for the company and its creditors. To rely on the safe harbour, the company must be current on tax returns and employee entitlements, and the director must be actively seeking restructuring advice.
Director penalty notices
The ATO's director penalty regime (discussed in a separate article) makes directors personally liable for unpaid PAYG withholding, SGC, and GST. This liability is not discretionary — it is imposed by statute and is enforced by the ATO independently of any liquidation process.
Personal guarantees
Directors who have signed personal guarantees for company debts — bank facilities, lease agreements, supplier credit — are personally liable on those guarantees regardless of whether the company is solvent. This is contractual, not statutory, but it is the most common mechanism through which co-directors find themselves personally pursued for company obligations.
What co-directors should know
A co-director who is inactive or non-executive is not exempt from the Corporations Act director obligations. All directors have statutory duties. A director who relies on another director to manage the business without any oversight of the company's financial position is exposed if insolvent trading occurs. Active engagement with the company's finances — including reviewing management accounts, attending board meetings, and seeking advice when financial difficulty is apparent — is both a legal obligation and a practical protection.
Contact Merion if you are a creditor assessing the personal liability exposure of company directors in a recovery — we can help identify which directors may be amenable to personal pursuit.