Is a company director
personally liable if they fail to keep financial records?
It’s tempting for a company director to not respond to a
liquidator’s request to produce financial records if they
contain incriminating material, but is it wise?
In In the matter of Substance Technologies Pty Ltd
 NSWSC 612, a decision of the Supreme Court of New
South Wales (24 May 2019), Justice Rees considered a
liquidator’s application for orders that the directors
personally pay some $170,000 to the company for debts
incurred to the Australian Taxation Office (ATO) and Ausgrid
whilst the company was insolvent, largely because they
failed to keep / produce financial records.
Until late 2013, Substance Technologies Pty Ltd (in
liquidation) (the Company) operated a scrap metal yard at
Cooma in New South Wales. From at least 2009, the Company
rarely made a profit, and by 30 June 2013, had accumulated
losses of $374,373, and an ATO account balance (BAS) payable
In early 2014 it purchased scrap metal from Ausgrid, but
did not pay the invoiced cost of $78,463. On 2 January 2015,
Christopher Thaler, the sole director of the Company
resigned and his son Andrew Thaler was appointed director in
During Andrew’s directorship, Ausgrid entered judgment
for the debt, and subsequently had the Company wound up on
27 June 2016.
The liquidator made 3 requests to Andrew to deliver the
company’s financial records. Andrew ignored the requests.
The law on directors
The law makes company directors personally liable, if
there is good reason.
Section 588G and related provisions [of the
Corporations Act 2001] serve an important social
purpose. They are intended to engender in directors of
companies experiencing financial stress a proper sense
of attentiveness [to] avoid any increase in the
company’s debt burden. The provisions are based on a
concern for the welfare of creditors exposed to the
operation of the principle of limited liability at a
time when the prospect of … loss to creditors has become
- Barrett J in Woodgate v David
(2002) 55 NSWLR 222 at 
Section 588M provides that a liquidator is entitled to
recover from the directors, as a debt due to the company, an
amount equal to the loss or damage occasioned by insolvent
Specifically, a director must have contravened section
588G by (a) being a director when the company incurs the
debt; and (b) the company is / becomes insolvent at that
time; and (c) there were reasonable grounds for suspecting
that the company is insolvent; and if the director or a
reasonable person in their position would have been
suspected that the company would be insolvent by incurring
the debt, and did not prevent the company incurring the
The arguments raised by the
directors to defend the liability claim
The Court dealt with eight interesting arguments ranging
from Blackstone’s Commentaries to the privilege against
self-incrimination raised by the two self-represented
- The debts no longer exist because they have been
The Court: “If a bad debt proves to be recoverable, in
whole or in part, then the creditor remains entitled to
payment and to adjust its accounts to reverse the
write-off and recognise the income. This is consistent
with accounting standards”.
- The creditor has been dissolved, and therefore
the debts have been extinguished
Quoting Sir William Blackstone, Commentaries on the
Laws of England (1753) - Ausgrid had been dissolved
and a new corporation had taken over the contracts.
The Court: “The law of corporations has evolved
significantly from 1753 to the enacting of the
Corporations Act 2001. … it is sufficient to note
that statute overrides the common law [and] its new
persona is ... the same legal entity as Ausgrid.”
- Taxes are not debts incurred
The Court: “more recent authorities indicate that taxes
are debts incurred by the taxpayer for the purposes [of
- The obligation to keep financial records was
(relying on the fact that the company’s accountant was
able to prepare tax returns and financial statements for
the financial years ended 30 June 2009 to 30 June 2013)
The Court: “the obligation to keep financial records
under section 286(1)(b) is twofold: firstly, to keep
records which record the company’s transactions … and,
secondly to retain those records for seven years.
… Andrew did not provide any records to the liquidator
despite repeated requests.”
- The financial records were not produced relying
on the privilege against self-incrimination
The Court: “it is likely that the directors’ privilege
against self-incrimination has been abrogated by section
530A of the Corporations Act”. And
“Section 588E(4) makes clear that the presumption of
insolvency arises where the company has failed in ...
its obligation to keep records … for the seven year
period for which records ought to have still been in the
company’s possession when it when it went into
- The company was not insolvent - the ATO debt
could be paid and tax losses were an asset
The Court: “Christopher said the company could have paid
the entire balance of the ATO running account by
borrowing funds from himself and his wife” but no loan
“Accumulated tax losses are not an asset that can be
sold by the company to pay its debts as and when they
- Both directors said they did not suspect
The Court: Reviewing the company’s bank account
balances, the payment of its tax obligations and
financial statements “a director would have been left in
no doubt that the company was insolvent from November
- The company would pay the Ausgrid debt from
profits on sale of the scrap metal
The Court: “There is no evidence that the company
expected to earn such profits before the invoices were
due for payment, nor that the company had other means of
paying the invoices”.
Were the directors jointly
liable or only for debts incurred during their
Christopher and Andrew were directors during different
timeframes. In Christopher’s case, he was a director when
the company first fell behind with its tax payments and
incurred the debt to Ausgrid. In Andrew’s case, he was a
director when the company’s debt to the ATO and Ausgrid
increased due to penalties, interest and costs orders.
The liability of successive directors has not been
previously been judicially considered. The Court decided
that a director is liable only if they were a director of
the company at the time the debt was incurred. Therefore:
- Christopher was liable to the ATO for $23,083.09,
and to Ausgrid for $78,463 and interest to 2 January
2015 of $2,162.71.
- Andrew was liable to the ATO for $3,564.71 for
penalties and interest, and to Ausgrid for interest and
costs of $9,677.30 incurred from 2 January 2015.
Christopher and Andrew were jointly ordered to pay the
liquidator’s costs of the proceedings.
- Failing to produce financial records in response to
a liquidator’s request will open the gate to personal
liability of the directors of the company. That is
because section 588E(4) makes clear that the presumption
of insolvency arises from the failure to keep records.
- Financial records of a company need to be kept for
seven years to comply with section 286(2).
- Directors unable to produce financial records would
benefit from legal advice because there are several
defences available which were not raised in this case.
- Directors are liable for prosecution by ASIC for
destroying company records. In a recent case, a company
director was convicted and sentenced to a one-year, $500
good behaviour bond and ordered to pay $22,000 in