Could You Be Personally Liable if Your Own Business Fails?

Why does this come up when a customer fails?

Because a big unpaid invoice can push your own business into trouble, and that is usually when directors find out that some company debts are not only the company’s.

Most directors have never needed to know where that line sits. There is no reason you would. This page sets it out so you can work out whether it applies to you, and what to ask about if it does. It is general information, not advice about your business, and it does not tell you whether you are solvent.

Does limited liability protect me?

Generally, yes. Your company is a separate legal person, and its debts are its own.

That protection is not unconditional, and this is the part worth understanding before you need it. It narrows where a director has breached a duty, and there are separate regimes that make a director personally liable regardless of the company being separate. Three of them come up again and again for contractors: insolvent trading, director penalties for certain tax debts, and personal guarantees.

If none of those are familiar, this is the most useful reading you will do this week.

What is insolvent trading?

Directors have a duty under section 588G of the Corporations Act to prevent a company incurring debts when it is insolvent, meaning it cannot pay its debts as they fall due. ASIC’s guidance on that duty is set out in RG 217, which also covers the safe harbour protection. ASIC RG 217.

A liquidator, a creditor or ASIC can take action for insolvent trading, and ASIC has sought orders making directors personally liable for company debts. Consequences can include civil penalties, compensation proceedings and, in some circumstances, criminal charges. ASIC RG 217.

The practical point is timing. Nobody is asking whether your business eventually failed. The question is whether you took on new debts after the point it could no longer pay the old ones.

Which is why knowing your position now, rather than in three months, is the thing that actually protects you.

What is a director penalty notice?

A completely separate regime, and this one has nothing to do with whether your company is insolvent.

A director can become personally liable for the company’s unpaid PAYG withholding, GST and superannuation guarantee charge. The ATO describes the penalty as arising automatically when the company misses the obligation in full by the due date. Where a notice is issued, recovery can start 21 days later. ATO director penalties.

Here is the distinction that matters most, and most directors do not know it. Lodging on time and paying late is a different position from not lodging at all. Where amounts were never reported by their due date, the ATO can make its own estimate and apply penalties to that. ATO director penalties.

So find out which one you are in. Your accountant can check your Integrated Client Account with the ATO and tell you whether anything was lodged late or left unpaid. It is a straightforward request, and it is the single most useful thing you can establish this week.

Do personal guarantees survive the company?

Yes. A guarantee is your promise, not the company’s, so nothing that happens to the company touches it. Liquidation does not wipe it out. Trade credit accounts and equipment finance very often carry one, signed years ago and long forgotten.

So work through your creditors and find out which ones hold a guarantee from you. That tells you which debts follow you home, and it is almost never the same list as the one that feels most urgent day to day.

Can a liquidator take back money or assets?

In some circumstances, yes, and it catches people out on both sides of a failure.

Money you were paid in the six months before a liquidation began can be taken back as an unfair preference, where the company was insolvent at the time and you received more than a dividend would have paid you. ASIC liquidation guide. If a customer who later collapsed paid you unusually, outside your normal terms, that is the payment a liquidator looks at first.

It runs the other way too. Assets or cash moved to related parties for less than they were worth before a collapse can be pursued and the director penalised. If your related companies or trusts owe money to the trading business, a liquidator will come after those loans.

None of that is a reason to panic. It is a reason to raise anything unusual with an adviser before it gets looked at, rather than after.

What should I do if this is a live concern?

Write your position down before you decide anything. Four things:

• Are your activity statements lodged, and is anything unpaid?
• Which creditors hold a personal guarantee from you?
• What do related companies or trusts owe the trading business?
• How many weeks can you operate on income you are genuinely confident of?

Then talk to someone who works in insolvency. It is its own field. An accountant who does your annual accounts may be excellent and still not practise in it, in the same way a GP is not a specialist. Ask them directly whether they do this work. A good one will tell you straight and point you on.

Two things not to do while you work it out. Do not borrow from anyone charging high rates and large fees up front against your house. And do not take money out of your superannuation to pay business debts, because super is treated differently from your other assets and moving it can change that. Get advice before you touch either.

If you have a notice with a response date on it, or you are unsure whether you can keep trading, make that call today rather than at the end of the month.

Where does this leave the money I am owed?

It is a separate question with a separate answer. What you are owed by a failed customer is a claim in their administration or liquidation, decided by that process. Read what voluntary administration means for creditors, or the business pressure guide if the unpaid account is affecting your own commitments.

Can I talk it through over the phone?

Yes, and it is usually quicker than reading another page. Call the number shown here and say what has happened, including the parts you are not sure about. You do not need your paperwork in order first.

You do this once. We do it every day. The first conversation is for both of us to work out whether there is anything useful we can do. There is no form to fill in and nothing to sign. If it later turns into professional work, that is a separate agreement with its own fees, agreed with you in writing before anything starts.