One of the central features of a company is limited liability. The company is a separate legal entity. Its debts are its own. A director is not, in the ordinary course of business, personally responsible for what the company owes.
But the protection is not absolute. There are specific situations where the law removes it — where the director steps out from behind the corporate structure and becomes personally liable. And the ATO is enforcing harder than ever: in 2024–25 it issued more than 84,000 Director Penalty Notices, a 136% increase on the year before. Understanding where the line sits is one of the most important things a director of a small or medium business can know.
If your company is under financial pressure, the options available narrow quickly. A short conversation now can prevent a much larger problem later.
Book a Free Consultation →Insolvent Trading — Section 588G
The most significant source of director liability is insolvent trading. Under section 588G of the Corporations Act, a director has a duty to prevent the company from incurring debts when it is insolvent, or when incurring the debt would make it insolvent.
A company is insolvent when it cannot pay its debts as and when they fall due. The test is cash flow, not net assets — a company can own property, hold stock, and show a positive balance sheet, and still be insolvent because it cannot meet its current obligations on time.
If a director allows the company to incur debts while insolvent, they can be held personally liable for those debts in civil proceedings brought by a liquidator. If dishonesty is involved, criminal liability follows. ASIC has successfully prosecuted directors for insolvent trading and sought personal liability orders.
The Safe Harbour — Section 588GA
The Corporations Act contains a safe harbour for directors who are taking genuine steps to restructure a company and achieve a better outcome than immediate administration or liquidation. To access it, the director must be developing or implementing a course of action reasonably likely to lead to that better outcome, obtaining appropriate advice, and keeping proper records.
Two things about the safe harbour are commonly misunderstood. First, it is not a general protection — it requires active, documented steps. A director who simply hopes the company will trade through its difficulties cannot rely on it. Second, it requires the company's tax lodgments to be substantially up to date. A company that is behind on its lodgments has usually already lost access to the safe harbour — and the same unlodged returns are what turn an ATO penalty into a lockdown penalty, covered next.
Director Penalty Notices — The ATO Route
The ATO has a separate and significant mechanism for holding directors personally liable: the Director Penalty Notice, or DPN. A DPN can be issued where a company has failed to pay PAYG withholding, GST, or the superannuation guarantee charge by the due date. The notice is sent to the director's address on the ASIC register — and the clock runs from the date on the notice, not the date it is read.
Once a DPN is issued, the director has 21 days to act — pay the debt, appoint an administrator or small business restructuring practitioner, or place the company into liquidation. If none of those steps are taken within 21 days, the ATO can recover the penalty directly from the director personally.
Critically, where the amounts are unreported past the lodgment deadline, the DPN is a lockdown DPN — the director cannot avoid personal liability by putting the company into administration. The only option is to pay. This is why lodging on time matters even when the company cannot pay: lodgment preserves the 21-day window and keeps the penalty out of lockdown.
Payday Super has raised the stakes further. From 1 July 2026, super is payable every pay cycle rather than quarterly — which means unpaid super now accumulates DPN exposure from the first missed pay run, and the window to report before lockdown applies is tighter than under the old quarterly system.
Personal Guarantees
Beyond insolvent trading and DPNs, the most common way directors become personally liable for company debts is through personal guarantees. Banks, commercial landlords, and major suppliers routinely require directors of small companies to guarantee the company's obligations. Once signed, a personal guarantee is a direct obligation. If the company cannot pay, the guarantor must.
The exposure under a personal guarantee is often larger than directors realise — particularly where the guarantee contains an all monies clause that extends to future debts not yet incurred at the time of signing. A guarantee signed for the company's first loan may cover the overdraft extension two years later and the supplier credit after that.
How Phan Campbell & Associates Can Help
At Phan Campbell & Associates in Footscray, we advise company directors across Melbourne and Victoria on personal liability exposure — insolvent trading risk, Director Penalty Notices, and personal guarantees.
Because we are a combined legal and accounting firm, we see the full picture: the payroll and tax obligations that trigger DPNs, and the legal consequences that follow. If your company is under financial pressure, the time to get advice is now — not after a DPN arrives or a liquidator raises a claim. The earlier we are involved, the more options are available.
Frequently Asked Questions
1. When can a director be personally liable for company debts?
A director can be personally liable in three main situations: allowing the company to trade while insolvent (section 588G Corporations Act), receiving a Director Penalty Notice from the ATO for unpaid PAYG, GST or super, and signing a personal guarantee for the company's obligations.
2. What is a lockdown Director Penalty Notice?
A lockdown DPN applies where PAYG withholding or superannuation guarantee amounts are unreported past the lodgment deadline. Once issued, the director cannot avoid personal liability by placing the company into administration or liquidation — the only way out is to pay the debt in full.
3. What is the safe harbour for insolvent trading?
Section 588GA of the Corporations Act protects directors who are developing or implementing a course of action reasonably likely to lead to a better outcome than immediate administration or liquidation. It requires active documented steps, appropriate advice, proper records, and tax lodgments that are substantially up to date. It is not automatic.
4. What does an all monies clause in a personal guarantee mean?
An all monies clause extends a personal guarantee to cover all debts owed to the lender — including debts incurred after the guarantee was signed. A director who signed a guarantee years ago may be liable for later loans, overdraft extensions, and supplier credit they never separately agreed to. If your company is under financial pressure, book a free consultation with Phan Campbell & Associates.