Director Liability For Company Trading While Insolvent

Many people operate their business by using a company as the trading entity so that they cannot become personally liable for the debts of the business since a company is a separate legal entity. However, that has never been the end of the matter. Up until September 2017 a director of a company could be held personally liable for debts incurred by a company whilst it was insolvent (i.e. unable to pay debts as they fall due) if, according to section 588G of the Corporations Act: *     the person was a director at the relevant time;
* the company was actually insolvent;
* the company incurred a debt; and
* there were reasonable grounds for the director to suspect insolvency. As from September 2017 new “safe harbour” provisions have been introduced under section 588GA which state that a director’s liability for insolvent trading will not apply if:
* after the director suspects insolvency the director develops a course of action that is reasonably likely to lead to a better outcome for the company; and
* the company debt is incurred in connection with the course of action. This is a narrow but useful exception to the prohibition against directors allowing a company to trade while insolvent. Directors must always keep themselves informed about their company’s financial position and should not risk permitting the company to incur debts without knowing whether it can pay them otherwise they may be found to be personally liable for them!