A limited liability company is, by design, a barrier between its debts and its directors' personal assets. But that barrier is not absolute. In certain circumstances — some contractual, some statutory — a director can be personally liable for a company's unpaid debts. Understanding when that is possible can significantly change the recovery options on an otherwise unrecoverable account.
Personal guarantees
The most common path to director liability is a personal guarantee. Where a director has signed a guarantee as part of a credit application or supply agreement, the company's inability to pay does not extinguish the debt — it shifts the liability to the guarantor personally. The guarantee can be enforced against the director's personal assets.
A guarantee is only as useful as its execution. It must be signed by the director personally, not by the company. It should be properly witnessed. The credit application should identify the guarantor by name, and the guarantee clause should be conspicuous. Guarantees buried in fine print or signed by an unauthorised signatory are open to challenge.
Insolvent trading
Under section 588G of the Corporations Act 2001, a director can be personally liable for debts incurred by a company at a time when the director knew, or ought to have known, that the company was insolvent. This is the insolvent trading provision, and it is enforced by the liquidator, not directly by individual creditors.
If a company has been wound up and the liquidator has found evidence of insolvent trading, they can bring a claim against the responsible directors. As a creditor, you cannot typically pursue this claim yourself — but you can raise the issue with the liquidator and support their investigation by providing documentation of when debts were incurred.
Phoenix activity
Phoenix activity occurs when the controllers of a company allow it to accumulate debts and then transfer its assets to a new entity, leaving the old company with debts and no assets to pay them. This is illegal. The Australian Taxation Office and ASIC actively pursue phoenixing.
For a creditor, the practical issue is identifying whether phoenixing has occurred and reporting it. ASIC has an online tip-off form. The ATO also has a phoenix referral process. Recovery in a phoenix situation often requires legal action, and the evidence that you can contribute — correspondence, supply records, knowledge of asset transfers — is valuable to investigators.
Director ID and transparency
Since the introduction of the Director Identification Number (director ID) regime, directors of Australian companies are required to hold a unique identifier that follows them across all their directorships. This makes it harder for serial phoenix operators to obscure their history across multiple failed companies.
This article is general information. Director liability is a complex area of law — seek qualified legal advice about your specific situation before taking action.
If you are dealing with a non-paying company and want to understand your options, speak to Merion.