Company Liquidation Director Liabilities

Can A Director Resign When A Company Is In Liquidation

The short answer: No! And even if you resigned in the period leading up to the liquidation, you will still be held responsible for your conduct whilst you were the director.

Who Is A Director?

While this may seem like a simple question, the answer may surprise you.

A director is not just a person formally appointed to that role. The Corporations Act 2001 states that a person may be a director if they act in that role, even if they are not formally appointed. A person may also be deemed a director if the appointed directors of the company or key staff act in accordance with their wishes or instructions.

If you were not formally appointed as a director you may be unable to technically resign from the role. This means that you may still be held personally liable as a deemed director even if you were never formally appointed.

Should A Director Resign During Liquidation?

While it may seem tempting to resign from your position as director, there is often little benefit.

When a company enters liquidation the director loses all decision making powers and is essentially relieved of their director responsibilities. At the point a liquidator is appointed, they immediately gain control of all company affairs and assets. The powers of a liquidator are further explained in Section 477 of the Corporations Act and include;

  • Collect and protect assets of a company;
  • Trade the business of a company;
  • Sell the assets of a company;
  • Investigate the financial affairs and any transactions of the company;
  • Undertake any legal recoveries or claims.

Even if a director was to resign during the liquidation process, which they cannot do, they would still be required to assist the liquidator as deemed necessary. This includes supplying supporting documents such as the company’s books and records.

Further to this, simply resigning as a director will not exempt you from being included in the company investigation. As part of the liquidation process, the appointed liquidator must undertake a detailed investigation into the company’s financial dealings including reasons for failure and the conduct of the directors and any shadow directors. Your actions during your time as director will be investigated and reviewed to identify whether any illegal activity or breach of director duties took place.

The law requires directors to maintain proper books and records and also:

  • Take active steps to question and confirm the financial position and solvency of the company;
  • Regularly review the company’s financial situation;
  • Seek advice from qualified professions is a problem is suspected;
  • Act in a timely manner to address any solvency issues.

If a director is found to have acted illegally such as insolvent trading or breached their director duties during their period with the company: they may be personally liable for the debts of the company, be imprisoned for up to 10 years, or be fined. Directors may also be disqualified from managing future corporations under Section 206B of the Corporations Act if:

  • The person is convicted on indictment of an offence that;
    • Concerns the making or participation in making decisions that affect the whole or a substantial part of the business of a corporation or its financial standing
  • Is convicted of an offence that:
    • Is a contravention of the Corporations act and is punishable by imprisonment for a period greater than 12 months; or
    • Involves dishonesty and is punishable by imprisonment for at least 3 months
  • The person is an undischarged bankrupt
  • The person has executed a Deed of Arrangement under Part X of the Bankruptcy Act which terms have not been fully complied with.

Resigning during liquidation will not help the director as it is their actions prior to the liquidation that are investigated.

What Are The Effects Of Liquidation On A Director?

While being the director of a company facing liquidation is not an enviable position, it may not be as bad as you fear. Many directors fear that they will be personally liable for the debts of the company and may lose their home and other personal assets. For this reason, many directors will either avoid liquidation or are tempted to resign during the process.

While there is the possibility of personal liability and loss of personal assets, as long as the director has acted lawfully and fulfilled their duties, this will be unlikely. A director may also be personally liable if they have signed a personal guarantee to a creditor. Personal guarantees allow a creditor to place a direct claim on the guarantor and potentially, their personal assets. If a director fully understands their duties and performs them in accordance with the Corporations Act and has not agreed to any personal guarantees, they should have little to worry about in relation to personal liability.

With personal liability off the table, the next worrisome thought for directors is that they will be unable to hold this title again in a new company. This is incorrect. While there are rules in place regarding the ability to be a director in the future, it is possible to be a company director again immediately. For more information on these rules and further information regarding directing a company after liquidation, click here.

Explore these related articles for more information:

Can you be a Director after Company Liquidation

What Happens To A Director When A Company Goes Into Liquidation