At law, a company is a separate and distinct legal entity from its owners and controllers. As such, the company is responsible for the payment of its debts.

A director has no personal liability for company debt however, the protection of a company structure is often signed away to suppliers who insist on a personal guarantee before agreeing to provide goods or services on credit.

Directors have no personal liability for a company debt unless the director gives up the legal separation. This can occur by doing one of the following:

• Signing a personal guarantee that promises to pay a company debt if the company can’t pay
• Failing to comply with a Director Penalty Notice issued by the Tax Office in respect of unpaid PAYG and superannuation.
• trading while insolvent

Personal Guarantees

By signing a personal guarantee, the director has agreed to pay the company’s obligations from his/her own assets in the event the company cannot meet its obligations.

Signing a personal guarantee is an enforceable promise that exposes your personal assets

A personal guarantee is legally enforceable and means the company’s creditor may attack a directors’ personal assets.

Personal guarantees are often sought to secure debts for;

• Supply accounts
• Company credit cards
• Hire Purchase or Leasing contracts

Because personal guarantees expose a directors assets, they should be avoided wherever possible.

Suppliers will often ask for a personal guarantee but directors should refuse. If certain supplies are only available from a few sources, it may not be possible to avoid a personal guarantee.

In these cases, a director should consider providing a limited personal guarantee up to a specific amount strattera weight loss. If a supplier ultimately allows the debt to increase beyond the agreed amount, the amount over the specified limited will generally not be recoverable under the personal guarantee.

Unfortunately, banks and finance companies, have very sophisticated paperwork and it is usually not possible to avoiding a personal guarantee when dealing with such institutions.

What is the best advice on personal guarantees

The best advice is to read and understand every document before signing it. If this involves seeking legal advice – do so. The small amount spent now will save you money and protect your personal assets in the long run.

A Double Standard – but in your best interest

 

 

Director Penalty Notice

A Director Penalty Notice can lead to personal liability for a company debt, specifically in relation to unpaid PAYG and unpaid superannuation

A Director Penalty Notice works in 2 ways

First, where all BAS & Super returns are up to date, with all having been lodged within 3 months of the due date, a director receiving a Director Penalty Notice will have 21 days in which to do one of the following and avoid personal liability for company debt.

Compliance involves doing one of three things.

1. Pay the debt in full
2. Appoint a Voluntary Administrator
3. Appoint a Liquidator.

If compliance is achieved within 21 days, the director will avoid personal liability for the stated company tax debts.

Second, If all or some BAS & Super returns have been lodged more than 3 months after the due date for lodgement, a director will become automatically personally liable for the company tax debts – no avoidance of personal liability is possible.

If a director has not lodged a return or any returns, the ATO can issue an estimate of the debt and follow that with a Director Penalty Notice that will find the director personally liable for company debt.

Insolvent Trading

A director must not allow a company to trade and incur debts when it is insolvent.

A company is insolvent when it is unable to pay its debts as and when they fall due for payment.

If a director allows a new debt to be incurred knowing the company is insolvent, the director may be guilty of insolvent trading. If this occurs, a director may become personally liable for the repayment of the debts he allowed the company to incur.

Liquidators or an individual creditor with the permission of the liquidator, may bring may commence a claim for insolvent trading against a director personally.

There are always options

Directors need to understand that no matter how dire the financial situation,  liquidation is not the only solution. It is only one of many alternatives that are available to you. 

In this regard, The Insolvency Experts will help you investigate and understand all your options to ensure you select the best step for you and your family’s financial survival.