Your Company's Debts, Your Problem: Asset Protection for Directors of Australian Companies

One of the central premises of Australian corporate law is that a company is a legal person separate from those who own and manage it. This doctrine of separate legal personality means that, in ordinary circumstances, a company's debts are the company's responsibility, not those of its directors or shareholders. It is one of the foundational reasons that people choose to conduct business through a corporate structure rather than as a sole trader or partnership.

But the protection that a company structure provides for directors is neither absolute nor automatic. Australian law contains a significant number of mechanisms statutory, contractual, and equitable that pierce the corporate veil and expose directors to personal liability for the debts and conduct of the companies they manage. In an environment of rising corporate insolvencies and heightened regulatory attention, understanding those mechanisms and the steps directors can take to genuinely protect their personal assets has never been more important.

In December 2024, ASIC reinforced this message by releasing an updated version of Regulatory Guide 217: Duty to prevent insolvent trading: Guide for directors (RG 217). Released on 6 December 2024 and replacing the previous 2020 edition, the guide provides the most comprehensive and current statement of the regulator's expectations of directors and, critically, of the steps they can take to protect themselves from personal liability under the safe harbour provisions of the Corporations Act 2001 (Cth).

What Makes Directors Personally Liable: The Key Pathways

Before considering how directors can protect themselves, it is worth understanding clearly how personal liability arises in the first place. There are several distinct pathways, each operating under a different legal regime.

Insolvent trading under section 588G of the Corporations Act is the most frequently litigated source of director personal liability. That section imposes a positive duty on every director to prevent the company from incurring debts at a time when the company is insolvent or when incurring the debt will cause the company to become insolvent. A director who breaches this duty may be ordered to personally compensate the company for the debts incurred during the period of insolvency. Civil penalties currently up to $200,000 may also apply. Where the insolvent trading involved dishonest conduct, criminal liability follows.

Director Penalty Notices (DPNs) issued by the Australian Taxation Office represent a separate but equally serious pathway to personal liability. Under the taxation legislation, the ATO may issue a DPN to a director requiring them to personally pay amounts owed by the company in respect of PAYG withholding obligations, GST, and superannuation guarantee charges. The power to issue a DPN is triggered when a company fails to lodge its tax statements or pay its obligations within the prescribed period. Once a DPN is issued, the director has 21 days to cause the company to pay the debt, enter voluntary administration, or appoint a liquidator or become personally liable for the amount. Critically, for "lockdown" DPNs (those issued where lodgements were never made on time), payment of the debt or appointment of administrators is the only way out: the director penalty cannot be remitted.

Personal guarantees are a contractual pathway to personal liability that many directors accept without fully appreciating their consequences. Lenders, landlords, and key suppliers frequently require directors to personally guarantee the company's obligations as a condition of transacting with it. A guarantee signed by a director is a direct personal obligation: if the company defaults, the creditor may pursue the director directly without first exhausting remedies against the company. The guarantee typically covers all amounts owed by the company and may remain enforceable long after the director has ceased their role.

Unreasonable director-related transactions under section 588FDA of the Corporations Act allow a liquidator to recover assets or value transferred to a director in the period before the company's insolvency, where those transactions are found to have been for less than market value. Payments characterised as director's fees without any genuine basis, or transfers of company assets to associated entities or family members at undervalue, are vulnerable to attack. These provisions can undo asset protection strategies that were implemented too late or too clumsily.

What Happens When Protection Fails: Stone v Mandalinic

The Federal Court's decision in Stone (Liquidator), in the matter of RIC Admin Pty Ltd (in liq) v Mandalinic (No 2) [2024] FCA 164 illustrates with precision what happens to a director who fails to take these risks seriously.

Mr Mandalinic was the sole director of RIC Admin Pty Ltd, a construction consulting business, from its incorporation in December 2014 until its liquidation in November 2019. The liquidator brought proceedings alleging that Mr Mandalinic had allowed the company to trade while insolvent, in breach of his duties under section 588G(2) of the Corporations Act, and that he had engaged in unreasonable director-related transactions.

The case proceeded without Mr Mandalinic appearing for the hearing. The Court's findings paint a familiar picture of corporate failure. The company had failed to maintain adequate books and records. Its MYOB financial files for the 2017–18 financial year demonstrated net profits of only $25,751 insufficient to meet its outstanding PAYG withholding obligations. The ATO had issued estimates of unpaid PAYG withholding for the period from September to December 2017 totalling over $2 million, and the company had failed to pay those estimates.

Using the well-established indicators of insolvency articulated in the earlier decision of Australian Securities and Investments Commission v Plymin (2003) 175 FLR 124 including inability to pay debts on time, overdue creditors, reliance on related-party funding, and failure to produce timely and accurate financial information the Court was satisfied that the company had been insolvent from at least August 2017. The Court found that the director had breached his duty to prevent insolvent trading and ordered him to personally compensate the company for the debts incurred during the period of insolvency.

The Court also found that certain payments to Mr Mandalinic from the company during that period, characterised as director's fees, were unreasonable director-related transactions because the company's financial records contained no source documents supporting those payments, and there was no agreement between the company and the director to pay fees in those amounts. Those payments were recoverable by the liquidator.

The lessons of Mandalinic are clear. Inadequate record-keeping, failure to meet ATO reporting obligations, and payments to directors without proper documentation are precisely the behaviours that expose directors to personal liability. They are also, notably, the behaviours that ASIC's updated RG 217 specifically identifies as risk factors that will inform its assessment of whether a director has breached their duty.

The Safe Harbour: ASIC's December 2024 Guidance

The safe harbour regime, introduced into the Corporations Act by section 588GA, is the most significant formal protection available to a director who suspects their company may be in financial difficulty. It provides that a director will not be liable for insolvent trading in respect of debts incurred during the period in which the director was developing and implementing a course of action that was reasonably likely to lead to a better outcome for the company than immediate administration or liquidation.

ASIC's updated Regulatory Guide 217 (December 2024) provides the most detailed guidance to date on how directors can establish and maintain the safe harbour. ASIC sets out four key principles that directors should follow in carrying out their duties. These principles now form the benchmark against which ASIC will assess whether a director has complied with their duty and whether the safe harbour is available to them.

Key Principle 1: Actively monitor company solvency. Directors must ensure they have reliable, timely financial information about the company's position. This means regular board reporting on cash flow, creditor ageing, and key financial ratios. It is not sufficient to rely on information provided only when things appear to be going wrong. ASIC expects directors to be engaged with their company's financial position as a matter of ongoing governance, not crisis management.

Key Principle 2: Investigate financial difficulties. When warning signs arise whether through declining revenue, overdue creditors, difficulty meeting tax obligations, or reliance on related-party funding directors must investigate proactively. This means asking hard questions, commissioning financial analysis, and understanding the nature and extent of the company's liabilities. Passive acceptance of reassurances from management is not sufficient.

Key Principle 3: Seek professional advice. A director who suspects the company may be insolvent must obtain advice from a qualified professional whether a registered liquidator, restructuring adviser, accountant, or lawyer with appropriate expertise to assess the company's position and recommend a course of action. ASIC's guidance emphasises that the adviser must be genuinely qualified for the role and that the advice must be sought and documented before the relevant debts are incurred, not retrospectively.

Key Principle 4: Act in a timely manner. The most common failure in insolvent trading cases is delay. Directors who recognise that a company is in financial difficulty but postpone taking formal steps hoping that trading conditions will improve, that a new contract will arrive, or that a potential investor will appear put themselves at serious risk. The safe harbour is available from the point at which a director begins genuinely developing a course of action. It does not apply retrospectively to debts incurred before that point.

The safe harbour will not be available if the company was not paying its employee entitlements (including superannuation) as they fell due, or if the company was not meeting its tax reporting obligations at the time the director seeks to rely on the protection. This means that a director who has allowed the company to fall behind on superannuation or BAS lodgements cannot access the safe harbour even if they later engage a restructuring adviser and develop a credible rescue plan.

Structural Asset Protection: Planning Ahead, Not in Hindsight

Beyond the safe harbour, the most effective asset protection for directors is structural and it must be implemented well before any financial difficulty arises. Structures put in place when a company is already insolvent, or designed specifically to move assets out of reach of existing creditors, are vulnerable to attack as voidable transactions. Genuine asset protection requires planning at the point of establishing a business, not at the point of crisis.

Separating personal assets from company operations is the foundational principle. Where a director holds personal assets — the family home, investment property, superannuation, share portfolios within the same legal structure as the operating business, those assets are exposed to claims against the business. Holding personal assets in structures that are genuinely separate from the operating entity for example, in a family trust, in the name of a non-director spouse where that reflects genuine ownership, or in superannuation may provide meaningful protection, provided those arrangements were established genuinely and at arm's length.

The operating entity should hold minimal assets. A director who operates through a company that owns significant tangible assets, equipment, vehicles, intellectual property, real property is concentrating risk. Structures that separate the ownership of assets from the entity that bears operational risk can reduce the exposure of those assets to a liquidator's reach. These arrangements require careful legal and tax advice, as they interact with related-party transaction rules, income tax treatment, and the requirements of any lending or financing arrangements.

Reviewing and limiting personal guarantee exposure is a practical step that many directors overlook. Not all guarantees are unavoidable. Guarantees that extend beyond the specific obligation they were given to support for example, all-monies guarantees that cover any future obligation of the company to a lender carry significant hidden risk. Directors should review their existing guarantee portfolio regularly and, where possible, negotiate to limit, cap, or release guarantees as the company's credit position improves.

Directors' and officers' (D&O) insurance provides a further layer of protection. ASIC's updated RG 217 specifically identifies D&O insurance including cover without insolvency exclusions as a component of a director's risk management framework. D&O insurance does not prevent liability from arising, but it provides the financial resources to respond to claims and to fund the defence of proceedings that might otherwise be prohibitively expensive. Directors should confirm that their company's policy remains current and that its coverage terms are appropriate for the nature and scale of the company's operations.

The Lesson from 2024

The combination of ASIC's updated RG 217 and the Federal Court's decision in Mandalinic sends a clear and consistent message: personal liability for company debts is a real risk for Australian directors, it arises more readily than many appreciate, and the legal system will pursue it even when a director chooses not to engage with the proceedings.

The protections available the safe harbour, structural separation, guaranteed liability management, and D&O insurance are all accessible to directors who plan ahead. They are largely unavailable to directors who act only when the company is already in crisis. The time to think about asset protection is not when a liquidator's letter arrives. It is now.

Shire Legal is a boutique law firm based in Miranda, NSW, specialising in property, business and estates law. This post is intended as general legal information only and does not constitute legal advice. You should seek advice specific to your circumstances before taking any action.