In the event of insolvency, Directors' personal liability to credit card providers for expenses incurred on behalf of their companies can be a murky issue.
Are Directors personally liable for debt on credit cards used for company benefit, if their business fails?
Directors seeking to avoid personal liability for debts on cards used only for company purposes should ensure that their service contracts contain an indemnity clause.In absence of such an indemnity, Directors will not be able to amend contracts and have such protection backdated after a liquidation has commenced. Therefore they will be personally liable for these company debts.
Attempted avoidance of liability
The Supreme Court of NSW recently made its ruling following an application to the Industrial Relations Commission (IRC) by two directors of One.Tel. The applicants sought to have their service contracts with One.Tel declared void for failing to provide such indemnities and for imposing personal liability.
The responsibilities of liquidators include determining which claims are admitted as proof against the insolvent company. Section 553 (1) of the Corporations Act allows for the admission to proof of claims both present and future, providing that they arise from circumstances that occurred before the windup date.
It is the future category of claim that is contentious, when applicants seek to move the goal posts by backdating variations to contracts.
The case ruling
The Supreme Court was required to give leave for the IRC proceedings to continue, by determining whether a prospective IRC Order might constitute a provable claim in the winding up. The Court ruled that any Order the IRC might make to indemnify or compensate a director for personal liability of credit card debt, would only apply from the date such Order was made. Therefore, an Order made after windup will not be a future claim provable in a liquidation.
In the case of One.Tel, the application was not perceived to have merit. In any event, Directors are always able to prove for any debts incurred solely for the benefit of their company : company credit card expenses will rank as unsecured creditor claims in the liquidation, and will not receive the normal priority treatment afforded to employee entitlements. However, Directors seeking protection against pursuit by card providers should ensure that their service contracts provide for such an indemnity.