5 common liabilities after a director's resignation

As a company director, you can resign by giving notice to a company's registered office, and the day this happens is the date of effect. Although the Corporations Act outlines directors' duties and responsibilities, a number of liabilities remain after resignation. This article explains 5 common remaining liabilities after a director's resignation.

1. Insolvent Trading

A company director can be personally liable for company debts incurred by the company if:

• there were reasonable grounds to suspect the company was insolvent or would become insolvent when the debt was incurred;
• the director could be reasonably aware of these grounds, if not the ordinary person; and
• the director failed to prevent the company from incurring the debt.

Some key points about this continuing liability include:

• it applies to all company debts incurred while the company was insolvent during the director's tenure, not just debts existing at resignation;
• the liability continues indefinitely until the company is wound up and deregistered. Resignation alone does not extinguish it;
• the defences of reasonable grounds to expect solvency and taking reasonable steps to prevent debt accrual become harder after resignation;
• both former and current directors can be pursued jointly for insolvent trading liabilities; and
• liquidators commonly pursue ex-directors personally to recover insolvent trading debts on behalf of creditors.

2. Employee Entitlements

Company directors can be personally liable for certain unpaid employee entitlements that accrued during their time on the board. This includes all employee entitlements such as:

• wages;
• superannuation; and
• leave balances that remain unpaid.

The Australian Taxation Office (ATO) can also issue company director penalty notices making directors personally liable for unpaid PAYG withholding tax amounts that accrued while they were directors.

Some key points about this employee entitlement liability include:

• covers wages, super, annual leave, long service leave and redundancy payments;
• applies even if the entitlement crystallised after the director's resignation; and
• the company's inability to pay doesn't absolve company directors of the liability.

3. Taxation Liabilities

Company directors can remain personally liable for certain unpaid tax obligations that accrued during their tenure as director, even after resignation. This includes being held personally liable to pay any unpaid PAYG withholding tax amounts that related to the period they were a director. This applies regardless of when the tax office pursues recovery of those amounts.

Some key points about these tax-related liabilities include:

• they cover employee PAYG withholding tax amounts and superannuation guarantee shortfalls;
• the liability is for amounts that accrued while the person was a director, even if left unpaid after resignation;
• both former and current directors can be pursued jointly by the ATO; and
• company directors can become personally liable even if not directly involved in withholding or remitting the funds.

4. Corporate Fault

Company directors can potentially face criminal liability for corporate wrongs involving death or injury, even after resigning from their positions.

While corporations themselves cannot go to jail, the law holds directors accountable in certain circumstances, such as workplace deaths or injuries. The penalties include up to 20 years in prison.

Some key points about these corporate fault liabilities:

• criminal prosecution is a risk for company directors/officers over serious incidents causing death or injury;
• corporate manslaughter laws allow prosecution of officers for negligence causing death;
• general criminal negligence laws also apply to systemic safety lapses by directors/officers;
• liability comes from conduct during the director's tenure; and
• consequences can be severe, including fines and potential imprisonment.

5. Personal Guarantees

Personal guarantees provided by company directors during their tenure will remain enforceable and binding even after they resign from the company.

Some key points about personal guarantees surviving after a director's resignation:

• the guarantee represents a personal debt obligation by the company director, separate from the company's liability;
• resignation does not terminate or invalidate any personal guarantees previously provided when the individual was a director;
• creditors can still pursue the former company director personally to recover amounts owed under the guarantee, despite their resignation;
• common examples include personal guarantees for company debts, loans, leases, trade credit accounts etc;
• the terms of the guarantee instrument determine when and how the liability can be enforced post-resignation; and
• company directors need to be cautious about providing open-ended guarantees that extend indefinitely.

By providing a personal guarantee, the director takes on a personal debt obligation in addition to their duties as a company director. That personal liability remains enforceable by creditors even after leaving the director role. It is crucial that directors always act in the company's best interests to avoid personal liability and protect their position.

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Key takeaways

When you are considering becoming a company director, be aware that certain liabilities regarding insolvent trading, tax, employee entitlements, corporate fault, and personal guarantees will exist beyond your tenure. Acting in good faith and in the company's best interests can help mitigate these risks.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.