In short
A company usually pays its own debts, but a director can sometimes become personally liable. The main risks are personal guarantees, insolvent trading, unpaid tax and super, breaches of duty and some corporate-trustee arrangements.
Doesn’t the company protect you?
A registered company is a separate legal entity. It owns property, enters contracts and incurs debts in its own name. A shareholder does not ordinarily become liable for every company debt merely because they own shares.
That separation protects directors and shareholders in many situations, but it has limits. You can still be personally responsible if you guaranteed the debt, allowed the company to incur debt while insolvent or breached your own duties as a director. An invoice in the company’s name is only the starting point.
Did you give a personal guarantee?
Banks, landlords, financiers and suppliers often ask a director to guarantee the company’s obligations. If the company defaults, the creditor may enforce the guarantee against the director according to its terms. If a home or other asset secures the guarantee, that asset can be at risk.
A continuing guarantee may extend beyond one invoice or contract and ending it may not release existing liability. Review the signed guarantee, credit terms, variations and security documents together.
Was the company insolvent when it incurred the debt?
A company is insolvent when it cannot pay debts as and when they become due. That is a practical cash-flow test informed by the financial position as a whole, not merely whether the balance sheet shows more assets than liabilities.
Section 588G of the Corporations Act 2001 requires a director to prevent the company incurring a debt while insolvent, or where that debt makes it insolvent, if there are reasonable grounds for suspecting insolvency.
Warning signs include overdue tax and super, cash-on-delivery demands, repeated payment arrangements, dishonoured payments, unpaid employee entitlements and legal demands the company cannot meet. One disputed invoice does not automatically establish insolvency; the concern is a continuing inability to meet debts when due.
If insolvent trading is established, a liquidator or creditor may seek compensation. Dishonest conduct can carry criminal consequences. A statutory safe harbour can protect against specified
civil insolvent-trading liability where qualifying steps are taken to develop a course reasonably likely to produce a better outcome. It is not an automatic grace period.
If insolvency is suspected, seek insolvency advice while restructuring and safe-harbour options may still be available.
What happens with unpaid tax and employee super?
Directors can incur penalties equal to a company’s unpaid PAYG withholding, net GST and superannuation guarantee charge. The ATO must issue a director penalty notice before starting court recovery, but the penalty itself can arise before the notice is issued.
Whether appointing an administrator, restructuring practitioner or liquidator can remit the penalty depends on reporting. PAYG withholding and net GST reported more than three months late, and superannuation guarantee charge not reported by its due date, are “locked down” for this purpose. Paying the underlying company liability can still remit the corresponding penalty.
A director penalty notice is urgent. The 21-day period can start when the Commissioner leaves or posts the notice, not when you open it. The notice may be sent to a residential or business address held in information maintained by the Registrar, so the director’s address details must be current.
A new director can also become liable for penalties relating to amounts already overdue if, 30 days after appointment, the company’s relevant obligation remains unresolved. Resignation does not remove penalties connected with liabilities attributable to the period in office.
Can a breach of duty create personal liability?
Directors must act with care and diligence, in good faith for proper purposes, and must not misuse their position or information. A director who breaches those duties and causes loss may be ordered to compensate the company. Civil penalties, disqualification and, for some dishonest or reckless conduct, criminal consequences can also follow.
This does not make the director liable for every unpaid invoice. The claim is based on what the director personally did or failed to do, and the loss that conduct caused. Related-party transactions, personal use of company funds and asset transfers for inadequate value deserve close attention when the company is under pressure.
What if the company is trustee of a trust?
A corporate trustee usually expects to meet trust liabilities from trust assets through its right of indemnity. Section 197 of the Corporations Act addresses circumstances in which directors can be liable where the trustee company cannot fully discharge a liability because its indemnity is unavailable through a breach of trust, conduct outside the trustee’s powers or a term denying or limiting the indemnity. A director is not liable under section 197 merely because the trust has insufficient assets.
Using a company as trustee does not remove the risk by itself. The result depends on the trust deed, whether the company acted within its authority and whether it can use trust assets to meet the liability.
What should happen when the company is struggling?
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Decide whether the company can realistically pay debts as they fall due while it continues incurring obligations. Use current bank balances, aged creditors and debtors, tax and super positions, finance facilities, employee entitlements, expected receipts and unavoidable payments, not optimistic forecasts alone.
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Identify personal guarantees and security already given. If a statutory demand has arrived, strict separate deadlines apply.
Once the figures and guarantees are clear, you can assess what options remain for the company and which of them could affect you personally. If tax, super, wages, suppliers or loans are not being paid, establish the real cash position before the company incurs further debt.
For advice about company distress or potential director liability, contact Biz Lawyers & Advisory or call 1800 893 836.
This article provides general information, not legal or insolvency advice. Liability depends on the debt, documents, reporting history and conduct.
Primary sources
Law and guidance checked 13 August 2026.
