The introduction last year of laws making company directors personally liable for their company’s outstanding PAYG and superannuation, and the subsequent collapse of Darrel Lea under a fortnight later, is a great reminder of the onerous commitment made when accepting a company directorship.

Directors must appreciate that they are putting their house (and everything else they own for that matter) on the line when taking on that position. In the case of Darrel Lea, the directors were certainly mindful of their potential personal liability in making the decision to meet with administrators who ultimately put this historical company into administration.

For emphasis, just consider the potential personal liability of a director of Darrel Lea for superannuation alone. It is reported that Darrel Lea had 700 employees. If the Australian Bureau of Statistics is to be believed, an average Australian wage is $55,000 per year. This amounts to an annual wage bill for the company of $38,500,000 a year or $9,625,000 per quarter. The quarterly super bill alone, based on the rate of nine percent of wages, is $866,250. This meant that if the directors of Darrel Lea did not put the company into administration, they would each be potentially liable for almost a million dollars in personal liability, just for superannuation. This is not to mention PAYG and all the other debts being incurred by the company. That’s a lot of chocolate!

In addition to PAYG and super, a company director could be personally liable for all its company’s debts if the company is trading whilst insolvent i.e. the company is incurring debt  whilst unable to pay them when due. Therefore, just like Darrel Lea, a director must stop their company from trading if it is unable to meet its debts. This usually means the company is put into administration of liquidation, a formal legal process.

The question to be posed to ascertain whether a company is insolvent is this: Is the company able to pay all of its debts as and when they become due and payable? To help, company directors should watch out for the following as signs of insolvency:

  1. continuing financial losses;
  2. bills being paid outside supplier trading terms;
  3. tax liabilities not being paid;
  4. supply terms being changed to cash on delivery “COD” terms;
  5. increasingly receiving letters of demands, solicitors’ letters and legal demands;
  6. large number of customers not paying their accounts on time;
  7. no up to date and accurate financial information;
  8. company cheques being dishonoured;
  9. knock-backs on finance applications; and
  10. excessive reliance on family members and friends.

Just remember the old saying: “where there is smoke, there’s fire”. As a director, keep your nose clear so you can smell the smoke. If you smell any, investigate. If it’s serious, or if there is any doubt, call your accountant or solicitor for guidance. That call could save you the roof over your head!

Joe Kafrouni, Legal Practitioner Director, Kafrouni Lawyers


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