Like all other financial decisions, a Voluntary Administration carry risk not only for the company, but also for directors personally.
Companies place themselves under both Voluntary Administration and liquidation when the pressure of mounting debt and the potential of insolvency becomes too great.
However, as both types of external administration are controlled by specific sections of the Corporations Act, company directors need to understand the legal obligations that will be imposed upon them and the role of the administrator/liquidator.
Director Liabilities and Responsibilities
An unplanned liquidation can not only be costly, but may also present unacceptable risks to directors. This is why we always recommend you seek advice from your perspective before any formal appointment is made. If you are thinking about a voluntary administration or a voluntary liquidation, here are three things you should consider.
Company Directors in Voluntary Administration lose control of the Company
Company Directors in voluntary administration or liquidation effectively relinquish control of their business.
Not only does a director lose control, but total control is now held by the administrator or the liquidator.
In the case of a Voluntary administration, the administrator will investigate whether the company can continue to trade for the purpose of offering creditors a proposal as to how the debt will be repaid BUT if at any time the administrator forms the view that the business is not profitable, he can close the business – and there is nothing a director can do or say to reverse that decision short of introducing funds to cover any shortfall.
It could be in our DNA to shop for the lowest price. In fact, it makes perfect sense to do so, but a company liquidation is not a product you can take home, own or control. As soon as you place a company into liquidation, the liquidator takes control, and you are answerable to them.
Apart from a total loss of control, directors choosing to appoint in either a Voluntary Administration or Voluntary Liquidation have subjected themselves to a very detailed and forensic examination of their performance.
The administrator will examine each transaction of the company and particularly those involving the director. If any breaches of the Corporations Act are discovered, they must be reported to the creditors and the Australian Securities & Investments Commission.
Similarly in a voluntary liquidation, there is a detailed investigation into the affairs of the company and its officers and again, a report is lodged with the ASIC and in both cases, this can lead to prosecution of directors.
Directors Must Assist the Administrator in their Investigation
A Director has a legal obligation to meet with and assist the external administrator with all reasonable requests. A voluntary administrator and liquidator can require a director to attend certain creditors’ meetings and to provide various forms of information. A director may be summons to a liquidators office or a Public Examination. Failure to attend can result in directors being arrested.
Specifically, Company Directors have a legal obligation to provide an administrator with:
- The details of the location of all company property
- The Company’s books and records
- The location of any other required records
- Records and Documents related to the activities of the company and its assets.
- Explanations as to the disposal or sale of company property
A failure to adhere with the liquidator’s investigations can have damaging consequences for directors as it is regarded as a serious breach of the Corporations Act.
Between October and December 2010 ASIC successfully prosecuted 75 individuals for various breaches of the Corporations Act 2001 for offences which included the failure to assist external administrators.
Director Penalty Notices Go Beyond Wages
As of June 1993, the Australian Taxation Office (ATO) has exercised the authority to issue Director Penalty Notices (DPNs).
Company Directors who fail to respond or take action regarding these Notices become personally liable equivalent to value of the taxes that have not been paid.
These provisions now go beyond PAYG withholdings not remitted to the Taxation office and now include unpaid superannuation guarantee charge liabilities for the company.
From 2012, the ability of a director to avoid personal liability by placing the company into administration or liquidation has been removed where amounts have been unreported and unpaid for over three months.
These changes in legislation have had an enormous impact on director liability and means that Directors can be held liable for unpaid PAYG withholding or SGC amounts.
Prior to these law changes, a director could place a company into liquidation and avoid personal liability for a company tax debt.
Since the law changes, there appears no incentive for a director to liquidate as there is no mechanism for avoiding the personal liability for company tax. That is, we have noticed many directors choosing to stay in business to at least have an opportunity of paying the tax debt rather than liquidation and facing the certainty of personal debt and possible bankruptcy.
A Final Note
Administrators are required to investigate all activities of company directors while the enterprise was trading insolvently. If an administrator or liquidator can demonstrate that the directors did not perform their duties and fulfil their responsibilities in the best interests of creditors they may be accused of breaches of their directors duties under the Corporations Act.
A director who is subsequently found guilty of such breaches can, depending on their prior history, be banned or disqualified from acting as a director. The usual banning period is between 1 – 5 years but there are provisions that enable even lengthier bans.
Therefore, if you are thinking of voluntary administration or voluntary liquidation as an easy way to duck your responsibilities or avoid repaying debts, it may be wise to first consider other options in order to prevent putting you and your personal assets at even greater risk.
This article is not to be construed as legal advice but is presented for information and research purposes only. No guarantee implied or expressed is given in respect of the information provided and accordingly no responsibility is taken by The Insolvency Experts or any member of the company for any loss resulting from any error or omission contained within this article.