Many businesses are operated through companies to limit the liability of the people behind the company, but there are circumstances when a director will be personally liable. It’s important to know when those liabilities may arise.
Paula Lines from The Law Shop explains that if a company director has given a personal guarantee and the company goes into liquidation, they'll need to repay the debts. If they can't, they'll have to consider their personal insolvency options, including bankruptcy.
“When applying for credit in the company’s name, the director might be inadvertently signing a personal guarantee as these are often tucked into the fine print. This would make the director personally liable to that particular creditor and would usually be unlimited so anything the company owes, the director will be liable for,” Paula clarifies.
A director can also be liable if he or she allows the company to trade recklessly. The Companies Act 1993 defines what reckless trading is.
“A director may also be personally liable for the debts of a company if he or she allows the company to continue to trade when it is insolvent. The Act contains a solvency test which the directors need to ensure the company can meet. It includes being able to pay its debts as they fall due, and having assets valued at more than the liabilities including contingent liabilities,” she says.
Directors may also have a personal liability to the IRD for taxes that have been withheld but not paid. If PAYE is not paid out after deducting it from an employees’ pay, it can lead to criminal charges. Plus, there is also personal liability under Health and Safety legislation.
“Directors need to be aware of and minimise risks of accident or injury in the workplace and must be proactive in managing risk. It’s hugely important,” Paula explains.
There are a lot of obligations a company director faces. Too often, the personal consequences for directors of neglecting or failing to understand these responsibilities only comes to the surface when the going gets tough and creditors are knocking on the door.
If you are worried that insolvency could be around the corner, you should make The Law Shop your first stop. The experienced team can provide expert legal advice for all business matters, whether things ebb or flow. Call them on 07 349 2924 for Rotorua or 07 572 5272 for Tauranga, or email here.