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!