Director duties, insolvency, liability: 8 ways to protect yourself

Director liability is a real concern when running a company. A failure to meet your director duties, or a risk arising through insolvency or liquidation, can result in personal exposure.

However, taking the right action while your company is still solvent can help you avoid personal liability, while acting early once financial difficulty arises can help reduce your personal exposure.

Here we look at eight practical strategies to reduce your personal exposure – whether you’re planning ahead, acting early or in crisis response mode.

Read our full guide: Are directors liable for company debts? Know your risk

Proactive vs reactive: why timing matters

If your company is financially healthy, you’re in the strongest position to protect yourself. You can apply proactive strategies before you face a situation that may expose you to personal liability.

These strategies include:

• understanding your director duties and director responsibilities in Australia, 

• monitoring solvency, and

• keeping pay-as-you-go (PAYG) withholding and super guarantee charge (SGC) current.

If your company is in financial trouble, you’re working with more reactive strategies – but you’re not facing a brick wall. These can still provide meaningful protection, but your options narrow and the stakes rise the longer you delay. 

Whether you’re acting proactively or reactively, the message is the same: know your risk and take action early. The earlier you act, the more opportunity you have to shield yourself from personal liability.

Strategies to protect yourself as a director

The following eight strategies cover the most important steps you can take as an Australian director to reduce your personal liability exposure. Some apply at all times; others become critical when financial difficulty emerges.

Now that we’ve looked at the strategies you can use to protect yourself, let’s explore each in more detail.

Unsure which strategies apply to your situation? Try our free Assess Your Options tool 

Each strategy explained

1. Understand your director duties

Under Sections 180-184 of the Corporations Act (Cth) (the Act), you have four core director duties or director responsibilities in Australia. These legal duties include:

1. Acting with care and diligence, 

2. Acting in the company’s interests (in good faith), 

3. Not misusing your position and 

4. Not misusing company information. 

Common law also requires company directors to act in the best interests of the company, rather than for their own benefit.

If you breach any of these duties, you may be personally liable for losses caused by breach as well as facing civil penalties, compensation orders and Australian Securities & Investments Commission (ASIC) disqualification – independent of insolvency. 

What to do: Make sure you know what your duties are before accepting a directorship, act honestly in your dealings with the company, and revisit your responsibilities if your company’s circumstances significantly change.

2. Continuously monitor solvency

Your personal liability for insolvent trading can arise when your company takes on a debt while it’s insolvent (unable to pay its debts as they fall due).

This holds even if you don’t realise your company is insolvent. If you’re one of several directors, make sure the other directors are also aware of any grounds to suspect insolvency, and take advice immediately – don’t wait for a formal trigger.

What to do: Make sure your management accounts are up to date and that you review them monthly. You should know your company’s cash position, creditor obligations and forward commitments at all times to help identify financial problems early and prevent insolvent trading.

Read our full guide: Insolvent trading in Australia: When am I liable?

3. Keep PAYG and SGC current

If you have unpaid PAYG withholding, SGC and goods and services tax (GST), you may face personal liability through a Director Penalty Notice (DPN).

Once a DPN becomes ‘locked down’ because your obligations weren’t reported on time, you can’t escape personal liability – even by entering liquidation or voluntary administration.

What to do: Make sure you pay your ATO obligations on time, every time. Even if you can’t pay on time, still report them to the ATO on time.

Read our full guide: Director penalty notices (DPNs)

4. Use safe harbour proactively 

Safe harbour (Section 588GA of the Act) protects you from insolvent trading liability while you’re pursuing a genuine restructuring plan. But you must take advantage of it straight away.

Small Business Restructuring (SBR) is one formal pathway that can provide a framework for you to seek safe harbour.

What to do: As soon as you notice financial distress, engage a qualified restructuring adviser and begin documenting a plan. This plan must be reasonably likely to lead to a better outcome than liquidation.

Read our full guide: Small business restructuring

5. Review personal guarantees carefully

Every personal guarantee you sign as a director creates a direct personal liability that can survive company liquidation.

If you fail to make payments, the creditor can go after you personally for the full guaranteed amount.

What to do: Before you sign any guarantee, seek to narrow the scope, for example with a capped amount, a specific facility only or a time limit. Once signed, maintain a list of all active guarantees and review them as your company’s financial position changes.

Read our full guide: Personal guarantees and insolvency

6. Manage director loan accounts sensibly

An overdrawn director loan account is a personal debt to your company from loans, drawings or other amounts taken from the company. 

This can include money or company assets taken for personal use, which may be recoverable by a liquidator and may also trigger a Division 7A tax liability.

What to do: Properly document all drawings as salary, dividends or complying Division 7A loans, keep your director loan account balance at zero or in credit, and seek advice before repaying DLA if your company is already insolvent.

Read our full guide: Director loan accounts and personal exposure 

7. Seek specialist advice early

The single most effective protection strategy is to seek qualified insolvency advice at the first sign of serious financial difficulty, before the situation reaches a crisis point. 

An insolvency specialist will review your situation and explore the options available to minimise personal exposure across all risks, including any potential impact on your personal interests.

What to do: Bring in an advisor swiftly. When choosing one, check their insolvency experience, professional qualifications and track record.

8. Consider creditors’ voluntary liquidation (CVL)

If it’s confirmed that your company is insolvent, initiating a CVL promptly stops further trading and can prevent additional insolvent trading liability.

A CVL gives you the most controlled way to end your company – and the opportunity for a complete reset.

What to do: Use our free Assess Your Options tool to help understand if liquidation or another course of action is right for your circumstances – and what your next steps should be.

Read our full guide: Creditors’ voluntary liquidation process

Practical action is the best path

Director personal liability is a risk in business, but the good news is that it is manageable. The key to surviving it is first to understand your exposure and second to act early enough to be able to use the options available to you.

These strategies give you practical steps you can take to protect yourself – whether you’re taking a proactive approach while your company is financially healthy or responding to financial difficulty that has already surfaced.