Old -v- New Directors – Personal Liability

Old -v- New Directors – Personal Liability

Recently in Substance Technologies Pty Ltd [2019] NSWSC 612 the Court considered personal liability for Old (resigned) and Newly appointed Directors for insolvent trading.

While an Old Director may be liable for insolvent trading on debts incurred up to the date of resignation, a New Director can become liable for interest on debts, as well as certain existing debts, incurred by the Old Director.

As liquidators, we often see Old directors resigning, believing they can avoid liability, and New directors being appointed who are often family members or friends believing they are helping out. However:

“An incoming director must familiarise themselves immediately with the Company for which they are now responsible and, if they discover the company is trading whilst insolvent, must act promptly to wind up the company…” Rees J said.

And this is particularly important for existing tax debts as a director has 30 days, starting on the day of appointment, before he/she will become liable to director penalties equal to all the Company’s unpaid PAYG withholding and unpaid SGC liabilities from 1 April 2012.

This means that unless a New Director either:

  1. causes payment of the ATO debt; or
  2. the appointment of an Administrator;
  3. or Liquidator

within the 30 day period, they will become and remain personally liable for the tax debt that was created by the Old director prior to their appointment.

Resigning the directorship within 30 days will not remove the personal liability for the New Director (or Old Director).

To avoid personal liability requires the New Director to exercise one of the 3 options listed above, within 30 days.