Director’s Personal Liability
Are you worried that you might do something that makes you personally liable for your company’s debts? There are a number of ways this can happen so we’ve brought the information together into this page. Most importantly, if your company is insolvent, or there is a real risk of insolvency, your legal duties expand to include creditors.
General duties
General duties imposed by the Corporations Act on directors and officers of companies include the duty:
- to exercise your powers and duties with the care and diligence that a reasonable person would have, which includes taking steps to ensure you are properly informed about the financial position of the company and ensuring the company doesn’t trade if it is insolvent;
- to exercise your powers and duties in good faith in the best interests of the company and for a proper purpose;
- not to improperly use your position to gain an advantage for yourself or someone else, or to cause detriment to the company; and
- not to improperly use information obtained through your position to gain an advantage for yourself or someone else, or to cause detriment to the company.
Duty to not trade while insolvent
As well as general directors’ duties, you also have a duty to prevent your company trading while insolvent. A company is insolvent if it is unable to pay all its debts where they are due. This means that before you incur a new debt you must consider whether you have reasonable grounds to suspect that the company is insolvent or will become insolvent as a result of incurring the debt. An understanding of the financial position of your company only when you sign off on the yearly financial statements is insufficient. You need to be constantly aware of your company’s financial position. If you are not sure if your company is solvent or not go to our page Is my company insolvent?
Duty to keep books and records
Your company must keep adequate financial records to correctly record and explain transactions and the company’s financial position and performance. A failure of a director to take all reasonable steps to ensure a company fulfils this requirement contravenes the Corporations Act. For the purposes of an insolvent trading action against a director, a company will be presumed to have been insolvent throughout a period where it can be shown to have failed to keep adequate financial records.
