This is a guest post by Sachin.

Under Australian law, a director can be held liable for both statutory debts owed by a company and in some cases may be held accountable in civil cases as well, notably when a company is acting as a trustee. Whether the issue is a law suit or a director penalty notice, you must be aware of your responsibilities as a company director.

Chapter 2D of the Corporations Act 2001 defines the responsibilities of company directors. As of the date of appointment, a director is under a large range of obligations regarding their actions. These obligations include responsibilities related to conduct of business, which obviously may also include incurring debt.

You may be aware of various prosecutions of directors involved in dubious business practices related to debt. Despite a lot of law, there’s still a persistent myth in corporate culture that for some strange reason, the people running a company somehow aren’t responsible for its debts and their own conduct. The exact opposite is the case. After all, who else could be responsible?

To quote Section 184(1) of the Corporations Act 2001- Good faith, use of position and use of information--criminal offences:

Good faith--directors and other officers
(1) A director or other officer of a corporation commits an offence if they:
(a) are reckless; or
(b) are intentionally dishonest;
and fail to exercise their powers and discharge their duties:
(c) in good faith in the best interests of the corporation; or
(d) for a proper purpose.
Not exactly vague, is it? In practice, a company director, while in office is basically fully responsible for the conduct of company business. 

The practical applications of Section 184(1), however, are also good examples of director liabilities in relation to debt. If a director, for example, took out a loan in the company’s name for their own personal use, that director would simultaneously be in breach of every part of Section 184(1). The loan would be a reckless action, premeditatedly dishonest, in bad faith, and not for a proper purpose. The director would be liable across a large range of business issues, as well as having committed an offence.

Other liabilities

There are two other basic areas of director liability for debt:

• Tax law- A company director may be held personally liable for unpaid company tax. A director penalty notice or garnishee notice may be issued by the Australian Taxation Office against the director or the company respectively. 

• Company acting as a trustee- If the company is acting as a trustee, section 197 of the Corporations Act 2001 provides that a director is personally liable for any liability incurred while the company is acting as a trustee. 

It should also be noted that debt collection agencies and debt recovery services acting to recover money from companies would be well within their rights as agents for their clients to institute complaints against legal companies with regulators.

Corporate insolvency is no joke. Nor is personal insolvency as a result of director liabilities. If you’re a director, pay close attention to your personal liabilities. You’ll never regret it.

Image courtesy