Is Your Business Facing Liquidation? Don’t Lose Your Home!

Whether you’ve been advised to do so, or simply feel as though you have no other option, liquidation is a drastic and terrifying situation for the uninitiated. It’s no surprise that we are inundated with directors who are worried that their homes or other personal assets might be dragged down with the business. The Good News In all likelihood, your home and other personal effects will be entirely unaffected by a liquidation. A company is a proprietary limited entity. The ‘limited’ part of that statement indicates that the owners have limited liability for the debts incurred during the operation of the business. As such, you as the director are protected under legislation during a liquidation process. The problem is that liquidation is such a complex beast. We have talked about some of the tangles here, but there are some circumstances that should concern you. If any of the following apply to you, consider seeking some professional advice. When You Should Be Concerned Unsecured debts are usually nothing to worry about. You do need to worry if: Your debts are secured – Specifically if they are secured by you personally. In this case, the creditor is entitled to recover its debts from you if the liquidation does not satisfy the debt. The ATO has issued you with a Director Penalty Notice – This could involve personal liability, for example if there is outstanding super or PAYG tax owing. You have signed a personal or director guarantee – You are personally liable for debts incurred in this manner. You think you may be deemed ‘reckless’ – that is, if you’ve sought out debts where a ‘reasonable’ person should have realised the business could not resolve these debts, you might be personally liable. This is sometimes hard to figure out because these terms are legal, not common sense. If this is the case for you, talk to a lawyer first and foremost. What Happens When a Company Goes Into Liquidation in Australia? When a company goes into liquidation, its assets are sold off to pay creditors. A liquidator is appointed to oversee the process, and the company ceases operations. Creditors are paid in a specific order, with secured creditors taking precedence. Shareholders are typically last in line for any remaining funds, and they may receive nothing if there are insufficient assets to cover all debts. What Happens to a Director of a Company in Liquidation? As

July 13, 2023

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The Good News

In all likelihood, your home and other personal effects will be entirely unaffected by a liquidation. A company is a proprietary limited entity.

The ‘limited’ part of that statement indicates that the owners have limited liability for the debts incurred during the operation of the business. As such, you as the director are protected under legislation during a liquidation process. The problem is that liquidation is such a complex beast.

We have talked about some of the tangles here, but there are some circumstances that should concern you. If any of the following apply to you, consider seeking some professional advice.

When You Should Be Concerned

Unsecured debts are usually nothing to worry about. You do need to worry if:

Your debts are secured – Specifically if they are secured by you personally. In this case, the creditor is entitled to recover its debts from you if the liquidation does not satisfy the debt.
The ATO has issued you with a Director Penalty Notice – This could involve personal liability, for example if there is outstanding super or PAYG tax owing.
You have signed a personal or director guarantee – You are personally liable for debts incurred in this manner.

You think you may be deemed ‘reckless’ – that is, if you’ve sought out debts where a ‘reasonable’ person should have realised the business could not resolve these debts, you might be personally liable. This is sometimes hard to figure out because these terms are legal, not common sense. If this is the case for you, talk to a lawyer first and foremost.

What Happens When a Company Goes Into Liquidation in Australia?

When a company goes into liquidation, its assets are sold off to pay creditors. A liquidator is appointed to oversee the process, and the company ceases operations.

Creditors are paid in a specific order, with secured creditors taking precedence. Shareholders are typically last in line for any remaining funds, and they may receive nothing if there are insufficient assets to cover all debts.

What Happens to a Director of a Company in Liquidation?

As a director of a company in liquidation, you have certain duties and responsibilities. You must cooperate with the liquidator and provide them with all the information they need to wind up the company’s affairs. You must also keep the liquidator informed of any changes to your circumstances.

In most cases, you will be personally liable for the company’s debts if you:

Traded the company while it was insolvent, knowing or being reckless as to whether it was insolvent.
Failed to keep proper books and records of the company.
Engaged in fraudulent trading.
Misappropriated the company’s assets.

The liquidator can investigate your conduct and bring legal proceedings against you if they believe that you have breached your duties.

Additionally, even if you are not found to be personally liable for the company’s debts, you can still face other consequences, such as:

Being disqualified from being a director of another company for a period of time.
Having a negative report made against you by ASIC.
Having difficulty obtaining credit in the future.

Don’t Be Complacent.

Liquidation is a serious matter, and many businesses have faced it in recent years. In fact, you can find the list of companies in liquidation in the ASIC website.

So if you are struggling financially, seek help immediately. Contact us today at 1300 181 220 or book a free consultation to help you protect your business.