Company Liquidation Insolvency

Will Liquidation Of My Company Cause Me Bankruptcy?

Will Liquidation Of My Company Cause Me Bankruptcy? | Insolvency Experts

If you’re a company director in Australia, and you’re having financial difficulty in your business and your company’s affairs, you may be considering working with registered liquidators to liquidate your company.

But when you wind up a company and creditors deal with the liquidator of your company, do you have to declare bankruptcy? Will liquidation cause you to lose your home or cause you to incur any other personal debts? In this blog from Insolvency Experts, we’ll answer these questions and many more. Let’s get started now.

Note: This post is for informative purposes only. Consult appropriate legal counsel before considering insolvency or corporate liquidation.

Bankruptcy Is For Individuals, Liquidation Is For Companies

First, let’s discuss a common misconception that company directors get confused about when they decide to declare that their company is insolvent. Personal bankruptcy is for individuals. If you cannot pay your debts – your personal debts – you may need to file for bankruptcy.

In contrast, liquidation is for companies, and is used when the company is in too much debt to continue operating. It’s for corporate debts – not personal debts.

These two processes are largely unrelated. Because of this, you will not automatically go bankrupt when you decide to liquidate an insolvent company. In fact, it can be that you will not incur any significant personal losses at all when you liquidate a company. Let’s discuss this subject in more detail now.

Company Liquidation Will Not (Usually) Cause You To Go Bankrupt

Even as the director of a company, you are legally distinct from your company. Even if your company is not able to pay its debts from its own resources, you, other directors, and shareholders are not required to pay for those debts personally.

Instead, your company alone is responsible for paying these debts. Even if your company does not have enough money to repay all the debts it has, these will not fall to you – they stay with your company. There are some exceptions, though, which we’ll discuss now.

There Are Exceptions For Company Directors – Understanding What Can Lead To Bankruptcy

There are some circumstances where, if you are a company director, you may be personally responsible for certain business debts incurred by your company. Here are a few examples of exceptions that could lead to personal debt – and even bankruptcy – for company directors.

  • Personal guarantees – A personal guarantee is a type of debt or legally enforceable agreement where, if your company is unable to pay its debt, the guarantor of the loan (usually the company director) will be personally liable for repaying this debt.

Essentially, this means that the lender will have a direct claim on you and therefore your personal assets – you will have to pay the debt, or negotiate an appropriate settlement or you may be forced into bankruptcy. That’s why it is risky to take accounts or loans for a company with personal guarantees attached.

  • Insolvent trading – Insolvent trading is an illegal activity, and can result in stiff legal penalties. If you take on new debt for your company when you know that is already insolvent and cannot pay its current debts when they come due, you may be found responsible for insolvent trading.

If you are found guilty of insolvent trading, you may be held personally liable to repay creditors, which can lead to loss of your assets or even bankruptcy.

  • Tax and super – If you are issued a DPN (Director Penalty Notice) by the Australian Taxation Office (ATO), you can be held personally liable for corporate tax debts. You cannot be held liable for unpaid Company Tax or GST, but you can be held liable for unpaid PAYG taxes and unpaid superannuation. In fact, with changes coming in April 2020, a director may be personally liable for unpaid GST where debts are not reported within 3 months of the due date for lodgement.
  • Breach of director duties – Company directors are held to certain standards. As a company director, you are required to regularly review the finances of the company, take steps to confirm its financial position and solvency, get help from professionals if you notice a problem, and act in a timely manner to resolve solvency issues.

If you take these steps and your company still becomes insolvent, you are less likely to be held liable for its debts. But if it can be proved that you did not adequately perform your duties as a director, you may lose personal assets through claims for insolvent trading and other such issues.

  • Illegal transactions – Illegal transfers of assets, such as a “Phoenix transaction,” where the assets of an indebted company are transferred to a new, debt-free company for the purpose of avoiding claims from creditors, can result in stiff penalties and the loss of personal assets and property, resulting in bankruptcy.

As long as you have not performed illegal or unethical activities, are paid up on your taxes and superannuation, and have not signed any loans with personal guarantees, you likely will not need to worry unduly about your personal assets being taken during the liquidation process.

What To Expect From Liquidation Or “Winding Up” A Company

Liquidation is one of the three common types of insolvency for companies in Australia. The options you have for declaring insolvency include liquidation or voluntary administration. A Deed of Company Arrangement (DOCA) may also be used in a successful voluntary administration.

Of these options, liquidation is typically the most straightforward process for declaring insolvency, and wrapping up a business’s operations. Let’s discuss the basics of the liquidation process now.

  • Creditors Voluntary liquidation – In order to deal with creditors claims, a voluntary liquidation may be used. This process is instigated by the director and shareholders.

If the directors and shareholders choose not to appoint a liquidator, a creditor may petition the court to wind up a company with a winding up application. This legal action will result in a court appointed liquidator of the company.

  • An independent, registered liquidator is hired – Once a liquidation has begun, a liquidator will appointed. Regardless of whether the liquidator is appointed by the Court or the shareholders, they work as an independent, neutral party, free of any conflicts of interest. They work for the benefit of the creditors of the company.

The duties of the liquidator are to wind up the affairs of the company, develop an understanding of the assets & property of the company, distribute assets among creditors, and investigate and report to the ASIC the circumstances of the company’s insolvency.

  • The liquidator conducts an investigation of the company – The liquidator will work with the company director and personnel to get an understanding of the company’s assets and liabilities, and they will look at financial statements, transactions, and other information to determine the cause of insolvency.

Legal action may be taken against the director(s) – In cases (such as those mentioned above) where a company director’s actions has contributed to the failure of a company, legal action or penalties may be levied against the company director.

  • All company assets are collected – A full inventory of all corporate assets will be created, and all company assets will pass into the legal control of the liquidator.
  • Creditors may make claims to the liquidator for outstanding debts – Secured creditors, unsecured creditors, and other creditors who have a claim for debts incurred by your business may seek claims from the company in liquidation. The liquidator will take control of the company’s assets to pay them off, based on the priority of their claims. When all of your assets are realised and debts have been paid to the extent possible, the process is concluded.

This is just a basic overview of the process. For more details, you can consult this guide from ASIC.

Learn More About Insolvency & Filing For Liquidation From Insolvency Experts

As licensed and registered liquidators and administrators, the team at Insolvency Experts can help you understand the entire Australian liquidation and winding-up process for businesses.

If you are having financial trouble at your business and are exploring your options for insolvency, we’re here to help. Contact us now, and get the information you need to make the right decision for yourself, your business, and your employees!

Company Liquidation Insolvency

If My Company Goes Into Liquidation, Will I Lose My House?

If My Company Goes Into Liquidation, Will I Lose My House | Insolvency Experts

If you are considering working with an insolvency practitioner and your company may go into liquidation, you might be wondering what’s going to happen to your personal assets. Do you have personal liability for debts taken on by your company? Will you have to declare bankruptcy, or will you lose your home if your company goes into liquidation?

At Liquidation Experts, we have more than 30 years of experience in liquidation, corporate administration and insolvency in Australia – and we’re here to help. In this article, we’ll discuss the basics about liquidation, bankruptcy, and the potential impact of liquidation on your assets property – including your personal home.

Note: This information is for informational purposes only. Consult with the appropriate legal counsel before making any decisions about liquidation, insolvency, and other such corporate restructuring changes.

You Are Not Responsible For Company Debt – Your Personal Assets Are Protected

As the director of a limited company, you have limited liability when it comes to company debt. You will not be held personally liable for the debts, in most cases – meaning your personal assets are protected, and there is no need to file bankruptcy, or worry about your house being taken when you go into liquidation.

If your company only has unsecured debt, you have no reason to worry about your house being taken if you enter liquidation. Your creditors will not have any claims on your personal assets – even if your corporate funds have run out and the liquidation process see creditors unable to be fully repaid, they will have no claim on your home, your property, or your personal assets, and you will be fully protected, unless insolvent trading or similar is found to have occurred.

In the vast majority of cases, this means that you will not have to worry about bankruptcy – or losing your house – after your company has been declared insolvent and has entered the liquidation or winding-up phase.

However, there are some situations in which it could be possible to lose your house during liquidation. Let’s discuss these in the next section – and how you can avoid these problems.

Is It Possible To Lose My House During Liquidation?

Unfortunately, there are some issues that could occur during liquidation that may affect your personal assets – and could lead to bankruptcy and the loss of your home.

  • Loans with personal guarantees – A personal guarantee is exactly what it sounds like. This is a type of loan where one or more persons (usually the company director) agrees to take on personal liability for business debt when the company cannot pay.

The loan or credit is issued to the company, and can be repaid by the company – but if it is not repaid, the creditor has a direct claim on the guarantor and potentially their personal assets. Even if you enter winding-up/liquidation procedures with your company, you may still be held liable for such debts if you took out a loan or credit with a personal guarantee.

The best way to avoid this issue is to never sign personal guarantees. This may be difficult for new business owners, and it can be tempting to sign a personal guarantee to get credit or a loan – but it could lead to the loss of your home or personal assets.

  • Secured loan on your home – If you’ve taken out a home equity loan against the value of your home for your business, or you have taken out a business loan that is secured by the value of your property, you will still be held liable for these debts after your company enters insolvency.

If you are not able to repay the loan or work out some kind of payment plan, you may have to declare bankruptcy or be forced into bankruptcy – or the lender may be able to foreclose on your house directly, depending on the circumstances.

  • Director loan accounts – It’s common for directors at any size company to have director loan accounts, from which they have borrowed money – or deposit money to be used in loans. If you have an overdrawn director loan account (you owe money to your company) this debt will not be discharged in liquidation – you will still be responsible for paying it.

To avoid issues related to this, be ethical in how you use director loan accounts – and keep tight controls on how they are used to prevent borrowing from the company from spiraling out of control. Large, unpaid director loan accounts will need to be paid.

  • Tax/super debts – If you have unpaid PAYG taxes and unpaid superannuation, you may be hit with a Director Penalty Notice (DPN) from the Australian Taxation Office (ATO). Even in liquidation, you will be held personally responsible for paying these unpaid taxes. From 1 April 2020, this will also relate to unpaid PAYG in certain circumstances.

To avoid tax and super debts, ensure that your company is paid up on GST/PAYG taxes and superannuation at all times. Minimizing the amount of unpaid tax/super debts from the ATO will help safeguard you from personal liability.

Unethical behavior as a company director such as Insolvent Trading – Illegal, unethical behavior as a company director can result in a wide variety of penalties being levied against you – and even the loss of your personal assets, if judged appropriate by the court.

For example, if you are found to be responsible for insolvent trading – taking out more loans and debts when you were already unable to repay your current debts – you could be penalized heavily, and ordered to repay debts from your personal assets. This could result in bankruptcy and the loss of your house.

Another issue that could result in penalties is a “Phoenix transaction,” where company assets are transferred from one heavily-indebted company to a company without debt – with the intent of avoiding repayment to debtors during the insolvency process.

You may also be subject to penalties if you’re found to be in breach of your duties as a company director – not paying attention to the solvency of your company, failing to do due diligence on your financials, and so on.

As a company director, the best step to avoiding the loss of your house during liquidation is to be a diligent, reputable, and ethical company director. All of these above issues can be avoided if you are responsible – and avoid loans secured with your personal property, do not over-utilize director loan accounts, pay your taxes on time, and perform your job duties responsibly.

Consult WIth Liquidation Experts – Prepare For Insolvency & Liquidation The Right Way!

If you’re worried about losing your house when your company is found to be insolvent and is liquidated, we understand. The stress of winding down a company can be very difficult to deal with, particularly if you’re worried about your personal assets.

Need help understanding the process of company insolvency, and preparing for your own company to be liquidated? If so, Liquidation Experts is here to help. As ASIC-licensed, registered liquidators and administrators, we can help you understand what will happen throughout the liquidation – and give you the advice you need for a successful company liquidation in Australia.

We offer free advice 24/7, and can help you find the solutions you need to wind your business up successfully while protecting your personal assets. To get started, just give us a call at 1300 767 525, or contact us online.