There is no doubt, Liquidation and Corporate Insolvency can be complex, but in many cases, it is the best course of action.
However, many directors facing tough times don’t seek or obtain advice because they are desperately trying to avoid liquidation for all the wrong reasons. Why? Because they believe what their friend or the local experts in the pubs and clubs have to say on the issue.
By failing to get the right advice, a director can mistakenly believe he/she should sell their property or personal possessions to pay the Company’s debts. Or that person may believe liquidation should be avoided at all costs because they think something will happen which in truth will not.
Before speaking with us, many of our clients believed the wrong thing. But once they were armed with the correct information, they could make an informed decision. One that helped them move forward and improve their lives and those of their families.
So, with that in mind, here are the Top 8 beliefs about Company liquidation that are Wrong!
1. The Tax Office is Paid First.
The ATO ranks equally along-side all other unsecured creditors in a liquidation setting. The Tax Office does not have a higher priority than other creditors or Directors who have loaned money to a company.
This means that if there is to be a distribution as a result of the liquidation, the tax office, unsecured creditors and even the Director will shares funds equally as their claims are in the same class.
The only exception to this is in relation to unpaid superannuation which is collected by the Tax Office for the benefit of former employees. These amounts are paid before and in priority to unsecured claims in a liquidation scenario.
2. The Director Will Be Bankrupted and Lose Their Assets
Firstly, liquidation is about winding up the affairs of a Company alone. It does not follow that a Director becomes bankrupt.
In fact, one needs to understand that a Company is a legal structure that actually separates business risk from a Director’s Personal Assets. At law, the Company and the Director are two separate people.
So, if a Company cannot pay its debts, from its own assets, the Directors have no legal obligation to step in and pay those debts with their own personal assets.
Just saying that, the protection afforded to a Director by employing the Company structure can be lost. That is, a Director can be held personally liable for Company debts in a limited number of circumstances that may lead to bankruptcy. These include:
- Personal Guarantees
- Insolvent Trading
- Certain Tax and Super Claims
- Breach of Director Duties
- Illegal Transactions
3. The Director Cannot Be A Director Of Another Company in Future
Being a Director of one failed Company does not automatically lead to a Disqualification.
So, even if your Company needs to be liquidated, you can continue to act as a Director of your other companies, or accept directorships in new companies.
However, a Director can be banned from acting in the future in situations where they were an officer of 2 or more failed companies within a 7 year period and those companies failed to return at least 50 cents in the dollar to ordinary unsecured creditors and the conduct of the director is such that ASIC believes disqualification is warranted. Read more about that here.
4. A Director Won’t Be Able To Get Finance In The Future
While there is no doubt a Director may feel some impact on their ability to obtain finance, the effect of Liquidation on an individual’s credit rating is not as dramatic or long lasting as it is in personal bankruptcy.
In our experience, banks and finance companies are often prepared to lend even when a company is being liquidated and will do so on the basis of security offered and ability to repay.
Sometimes however, certain institutions will prefer to deal with a Director only when a liquidation is fully completed. In this regard, The Insolvency Experts effectively complete most liquidations very quickly – usually within 4 – 6 months of appointment.
5. The Director Will Lose Assets And Vehicles Under Finance
Not so although it is possible!
If you’ve been a good client and made all payments required by the finance facility, most finance companies are happy to continue receiving payments into the future and leave you with the car or asset.
However, Director’s need to know how a liquidator will deal with leased assets in a liquidation setting.
If a leased asset would generate a positive return for the Company in liquidation, the liquidator has two choices. He may either take and sell the asset or sell any equity in the contract. This will generally be to the Director who is typically the guarantor under the agreement.
With the funds realised on a sale, the liquidator will first payout the finance and the surplus is then deposited into the liquidation account for the benefit of the creditors.
If the director pays for the equity, that amount will be deposited into the liquidation account and the director will then continue paying the finance company and remain as guarantor of the contract.
If however the sale of a leased asset would result in a shortfall, or inadequate funds to payout the finance agreement, the liquidator will walk away from the finance contract.
If this occurs, the finance company will be left to deal with guarantor and may agree to continue payments and possession or repossess the asset. Read more here.
6. A Pre-Insolvency Middleman Is Required
Emphatically No! No! No!
Forewarned is Forearmed.
While the Unregulated, Unqualified persons providing Pre-Insolvency Advice would have you believe their Middle-Man services are needed, you should read what the authorities have to say about such providers. Read more here.
And again here for good measure!
The advice from these “Pre-Insolvency Advisors” is often false, unnecessary, misleading or questionable at best, and their promises to control the process or find and control a “friendly” liquidator are usually designed to extract a large fee from a vulnerable director who doesn’t know where else to turn.
Just don’t do it!!
All Directors are entitled to deal in confidence, with all Registered Liquidators directly, and without an intermediary.
Liquidators are qualified and regulated by the Australian Securities and Investments Commission. That regulation and oversight is for the benefit of Directors and the community generally.
Notwithstanding this, if you feel you still need some representation in your dealings with a liquidator, engage a qualified practicing solicitor. Again, qualifications and regulation is what is required here.
7. Liquidation Will Cause Further Creditor Harassment
Nothing could be further from the Truth.
If you don’t do anything, creditors will continue to hassle to get paid. The calls won’t stop but will intensify and will go on for weeks and months.
The purpose of liquidation is to stop the constant barrage of calls and this is done by the liquidator communicating to the creditors on the first day of the winding up process.
What that means is that once creditors are informed of the liquidation, they must deal with the liquidator’s office – and not you.
Creditors attention is now focused on the liquidator who will explain the failure of the Company. The director is expected to get on with life immediately.
8. Liquidation Will Take A Lot Of My Time
Not at All!
As soon as you place a company into liquidation, you don’t need to do anything other than what the liquidator reasonably requests in terms of assistance.
What this usually involves is handing over the books and records of the Company, providing a straightforward Report on the Company’s Affairs and Property and any answers or information the liquidator may require during the process.
Normally, a Director can expect to deal with the Liquidator’s office about half a dozen times in the period it takes to effectively complete the work of winding up a company.
Liquidation is not the end of life. It’s often the start of a new and brighter future.
The Insolvency Experts are Registered Liquidators – Licensed and Trusted Insolvency Professionals with over 30 years experience. We will listen and assess your financial situation before letting you know everything you need to know about Liquidation and whether it is appropriate for you.
The advice we provide is tailored to your specific circumstances. We will talk you through formal and informal options and discuss what’s best for you.
Our goal is to provide you with unbiased and correct information to enable you to make a fully informed decision that is best suited for you and your family in what are invariably difficult situations.
Call The Insolvency Experts on 1300 767 525 – Anytime 24/7