Earlier this week the Queensland Court of Appeal dismissed an application for leave to appeal a decision of the District Court in relation to proceedings brought by the Bank of Queensland against two directors who made a personal guarantee of a $500,000 loan to their company (which is now in liquidation).
Whilst this particular case provides no extraordinary legal implications or principles, it serves as a reminder that directors of companies need to be cautious and diligent to avoid being held personally liable for a company’s debts.
It is a fundamental principle of company law that the identity and existence of a company is separate to that of its shareholders and controllers. The principle provides a shield or veil of protection for directors in their day to day operation of a company. However, there are circumstances where this ‘separate entity’ principle will not apply.
Possibly the most common way that directors will become accountable for a company’s liability is when the director has made a personal guarantee in respect of the company’s obligations. The law is only able to protect the directors of a company so far as they seek to protect themselves.
A director’s guarantee is a serious undertaking which allows a lender to hold the director personally liable to pay any debts if the company is unable to meet its obligations. It is not uncommon for a lender to require a director to guarantee a loan and with a company that has minimal assets, the giving of a guarantee can be a serious decision and it will place a significant financial risk on the individual.
The case highlights the common situation directors might find themselves in on the back side of what seemed to be a bright future. These kinds of cases highlight the value of seeking advice before entering into transactions which will bind the company, and more importantly those that bind the individual.