Could You Be Personally Liable for Your Company's Debts?

A general guide for company directors on early warning signs, timing and why a private Assessment may help organise the next conversation.

Could You Be Personally Liable for Your Company’s Debts?

Last updated 18 July 2026

93% of Australian small businesses that completed a formal restructuring plan are still trading today.

That’s not a hopeful guess. It’s straight from ASIC’s 2024 review of small business restructuring (Report 810).

The directors behind those businesses did one thing differently: they started having conversations early with the right business advisory support, and potentially saved their business by doing so.

This post is about why that conversation matters, not just for your business, but for you personally too, in some cases.

The duty most directors don’t think about until it’s too late

Most business owners know they have responsibilities, like paying your staff, lodging your BAS, and paying the bills to keep the lights on. But there’s one obligation that catches directors off guard, and it can carry personal consequences.

Under Australian law (Corporations Act, s 588G), every director has a duty to prevent their company from incurring debts while it is insolvent. A company is insolvent when it can’t pay its debts as and when they fall due.

Does that sound familiar?

That sounds straightforward enough, but here’s where it can get uncomfortable for you. If your business has been trading whilst insolvent, even if you didn’t realise, you may be held personally responsible for those debts.

What “personally liable” can mean

When people hear “director liability,” it can sound abstract. It isn’t.

If a court finds that you allowed your company to trade whilst insolvent, the consequences can include:

  • Personal liability for the company’s debts. Creditors, ASIC, or a liquidator can pursue you personally for debts the company incurred while insolvent. This can extend to your personal assets, including savings, property, and in some circumstances, superannuation.
  • Disqualification from managing companies. You could be banned from serving as a director for up to 20 years. For many business owners, this effectively ends their career.
  • Criminal penalties in serious cases. Where dishonesty is involved, insolvent trading can carry fines and imprisonment. These cases are rare, but they do happen.

These aren’t theoretical risks reserved for corporate failures. They can apply to ordinary directors of ordinary businesses who continued trading when the signs were there.

Signs worth paying attention to

Most businesses don’t become insolvent overnight. It’s a gradual, and sometimes stressful, slide.

The early warning signs are often things directors live with for months before they act. If any of these sound familiar, it’s worth pausing to consider your position:

  • You’re regularly struggling to make payroll or pay suppliers on time
  • ATO payment plans are stacking up, or tax and superannuation obligations are overdue
  • Suppliers have moved you to upfront payment or shortened your terms
  • You’re relying on new revenue to pay last month’s bills
  • Creditors have started sending letters of demand or taking legal action
  • You’re avoiding the phone because you know who’s calling

None of these on their own means your business is insolvent. But if you’re nodding along to two or three, it may be a signal that your business is heading in a direction that carries personal risk.

If you’re recognising some of these signs, a short and confidential conversation with a business recovery professional can help you understand exactly where you stand. The first conversation is always at no cost.

If this is of interest, you can request a free business strategy assessment here.

The law actually rewards directors who act early

Here’s the part most directors don’t know: the Corporations Act doesn’t just penalise directors who trade whilst insolvent. It also protects directors who take early action.

The safe harbour provisions (Regulatory Guide 217) were introduced specifically to encourage directors to seek advice and explore restructuring options before things reach crisis point.

If you’re actively working on a course of action that’s reasonably likely to produce a better outcome for the company than immediate administration or liquidation, the law can shield you from personal liability for debts incurred during that period.

In other words, having the first few conversations early isn’t just good business sense and peace of mind, it’s a legal protection in some cases.

The numbers back this up

ASIC’s latest data paints a clear picture of what happens when directors engage early:

  • 3,388 small businesses entered the formal restructuring process between July 2022 and December 2024, a significant increase from just 82 in the prior period
  • 93% of businesses that completed a restructuring plan are still registered and trading
  • The median cost of the entire restructuring process was $21,998, far less than most directors expect, and a fraction of what a disorderly wind-up typically costs
  • Over $101 million was returned to creditors through completed plans
  • ASIC Commissioner Kate O’Rourke noted the regime “is starting to deliver on the intended policy objective of reducing the complexity and costs involved in insolvency processes for small businesses”

We believe the takeaway from this data is simple: business directors that address their financial position early have a genuinely strong chance of surviving and continuing to trade.

Where to from here

If this post has raised questions, or even just a quiet sense of concern, that’s not a bad thing. It just means that you’re paying attention.

Business Recovery Helpline offers free, confidential business strategy assessments designed for exactly this situation, with no obligation. There’s no sales pitch, and absolutely no judgement.

It’s a structured conversation with an experienced business recovery professional who can help you understand your position and your options.

You can request a free session by answering a few quick questions on our assessment page:

Request your free business strategy assessment →

This article is for general information only and does not constitute legal or financial advice. If you require advice specific to your circumstances, please consult a qualified legal or financial professional.

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