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Practice Note: 31/1/2022

When a company is experiencing extreme financial pressure, a director may feel overwhelmed and consider throwing their arms in the air, resigning, and walking away.

TIP: Before a company director resigns, advice should be sought and a risk assessment undertaken on whether the resignation could expose the director to personal liability. For example, an ex-director could be exposed to personal liability if the company has ATO debt and/or personal guarantees exist.

ATO DEBT: Personal liability for the company\’s tax and super obligation can be avoided if the liability was reported to the ATO within lodgement timelines. Then, if the company receives a Director Penalty Notice from the ATO the director can avoid personal liability by appointing an Administrator or Liquidator within the required time frame.

RISK: A person who has resigned as a director cannot put the company into liquidation or administration to avoid his or her Director Penalty Notice liability.

RECOMMENDATION: Before resigning the director should review the company\’s liability to the ATO and segregate it into liabilities reported on time and liabilities not reported within required timelines. This will identify the ex-directors potential exposure to the lack of action by remaining directors.

PERSONAL GUARANTEE: It is common for creditors to not release a director from personal guarantees while a debt remains owing by the company.

RISK: The ex-director can be exposed if the remaining directors do not pay the company\’s past debts. If a creditor commences legal action for debt recovery – the ex-director cannot negotiate by giving undertakings for payment by the company. The ex-director can be limited to how he or she will pay the guaranteed debt.

RECOMMENDATION: If a director wishes to resign and funds are available, negotiations can be entered into with creditors for settlement of the director\’s personal guarantee exposure. If these negotiations are unsuccessful, a letter should be written to personal guarantee creditors stating that the director is resigning and will not be liable under the guarantee for future debts incurred by the company.

COMMENT: When signing personal guarantees, inserting an expiry date for the personal guarantee can greatly assist a director to manage his or her exposure. ASSISTANCE: For your questions on bankruptcy and the protection it provides for company directors, call: 1300 060 122  or email: Copyright@2021 Nicholls Resources Pty Ltd. All rights reserved. Liability limited by a scheme approved under the Professional Standards Legislation. ____________________________________________________________ This newsletter is provided as general information only and is not advice. All client’s situations are different and independent advice should always be obtained. 

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