How long can a director remain liable for company debts after their resignation?
One of the most misunderstood aspects of directorship is the common belief that a director’s resignation will automatically erase their potential future liability for debts incurred by a company.
Whilst it is true that once a director formally resigns, they are no longer responsible for the ongoing management of a company, that now former director may however still remain liable for certain company debts should that company later be subject to external administration.
Continuing liability post-resignation
Directors can remain liable in respect to the following actions, should the company later be wound up:
Taxation liabilities: the Australian Taxation Office can issue a lockdown Director Penalty Notices for unpaid GST, PAYG withholding or superannuation contributions incurred while the director was in office (Director Penalty Notices: Personal Liability and Defences | Worrells) even after the winding up begins.
Personal guarantees: if a director signed personal guarantees for company creditors, they would need to ensure that they are removed as guarantor, otherwise, they may remain liable for debts if the company can’t pay (Minimising exposure under personal guarantees | Worrells).
Insolvent trading: under section 588G of the Corporations Act 2001, directors can be made personally liable for outstanding debts incurred by a company whilst it was deemed to be insolvent (Insolvent trading: directors beware! | Worrells).
Unreasonable transactions: directors can be held liable for causing the company to enter into transactions that unfairly depleted company assets and/or weren’t in the company’s best interests (Unreasonable director-related transactions that go beyond obvious benefit | Worrells)
How long do liquidators have to commence a potential claim
If a company is wound up, liquidators can review transactions entered into by a company dating back several years prior to the commencement of the winding up:
Breach of director duties: Claims for breach of statutory duties such as care, diligence and good faith typically fall under the 6-year limitation period for civil actions.
Insolvent trading: liquidators can pursue directors for insolvent trading within 6 years from the date the liquidation commences.
Voidable transactions: liquidators must commence proceedings within 3 years from the relation-back day (which depends on the type of appointment), or 12 months from the date of the liquidator’s appointment, whichever is later. Further noting that the Courts may grant an extension of time to commence proceedings if the liquidator applies within the original 3-year period.
To summarise, whilst a director’s resignation may stop their responsibility for the ongoing management of the company, it may not absolve them from personal liability due to the consequences of their past conduct and/or if they leave the company in financial distress. As those directors may later find themselves facing significant claims against them personally by a Liquidator many years after their tenure with the company came to an end.
Worrells, with 33 Principals across our Australia, assist companies and individuals to recover from difficult financial situations. Contact us for a complimentary and confidential discussion.
