Navigating the hazards of liquidation as a director

For directors considering liquidation, understanding the extensive personal risks involved is crucial to making an informed decision about the future of your company.When a company faces insolvency, the notion of liquidation can seem like a tempting way out. However, this path is rife with legal and financial risks for directors that must not be underestimated.It is important to remember that every situation is different. Whilst liquidation might be the right course of action for you and your company, it is essential to understand how liquidation exponentially amplifies personal exposures that, if not properly handled, can lead to unfortunate consequences.

The perils of personal guarantees

One of the biggest pitfalls directors encounter are the personal guarantees they have provided to creditors over the years. What may have seemed like standard paperwork could make you
personally liable for the company’s debts. Upon liquidation, those creditors will aggressively pursue directors to recover funds.


Even more concerning are the “charging clauses” frequently found in these personal guarantees. These clauses essentially make the creditor a secured creditor over your personal assets. They enable the creditor to lodge caveats and potentially force the sale of your home or other property to settle the company’s dues.

Director loan account risks

Section 588FDA of the Corporations Act
Another area of significant risk relates to director loan accounts. It is common for directors to withdraw funds from the company through these loan accounts instead of receiving a conventional salary and payroll. However, this practice can create substantial liabilities in
liquidation.

Under Section 588FDA of the Corporations Act, liquidators are empowered to take action
against directors for “unreasonable director-related transactions”. This provision allows liquidators to scrutinise and potentially claw back funds withdrawn via loan accounts if deemed
unreasonable given the company’s financial position.

Upon liquidation, one of the liquidator’s first actions is to demand repayment of any outstanding director loan account balances. These amounts can be staggeringly high, placing an immense
burden on the director’s personal finances.

Construction industry considerations

Queensland Building and Construction Commission (QBCC) Licensing
For directors operating in Queensland’s construction industry, the ramifications of liquidation are particularly severe regarding QBCC licensing. 

If a company enters liquidation, any director is deemed an “excluded individual” by the QBCC
and is prohibited from holding a QBCC license for three years.

If that same director is involved in a second company liquidation, they face a lifetime ban from
the industry. This can be financially devastating for those whose primary source of income derives from construction activities.

QBCC Deeds of Covenant
Additionally, directors of QBCC-licensed companies are frequently required to sign deeds of covenant to ensure the company meets financial requirements. In liquidation, these legally
binding deeds enable the liquidator to make demands on the director for shortfall amounts.

If the director fails to satisfy these demands, the liquidator can take aggressive actions such as
lodging caveats over the director’s personal property and potentially forcing sales to recover funds.

Preferential payments and section 588FGA

Section 588FGA of the Corporations Act 2001 (Cth)
One often overlooked but severe risk relating to liquidation involves preferential payments made
to creditors like the ATO while the company was insolvent.

Under Section 588FGA of the Corporations Act, if a liquidator successfully claws back such
preferential payments, the directors become personally liable for the PAYG withholding tax portion. In the event the liquidator recoups payments from the ATO, the directors must then personally repay the PAYG components – a liability many directors have failed to anticipate.

The necessity of professional guidance

The multitude of exposures highlighted here underscores why engaging professional
restructuring and insolvency experts is absolutely critical when insolvency becomes a possibility. Skilled advisors can forensically analyse your situation, pursue formal turnaround options,
negotiate with creditors, implement safe harbour protections, as well as take proactive measures to limit director liability.

If liquidation is unavoidable, these advisors meticulously prepare reports, ensure regulatory
compliance and establish defences before the liquidator’s appointment. 

They serve as an essential buffer between the director’s interests and the liquidator’s objective of maximising recoverable funds.

Informed decision-making

Liquidation is not a panacea that washes away a director’s woes. On the contrary, it initiates a
high-stakes process filled with legal and financial implications capable of obliterating personal
wealth and future prospects. 

From personal guarantees and director loan accounts, to QBCC and preferential payment risks, the exposures are vast. Directors who naively pursue liquidation without full preparation and
skilled guidance are in danger of severe personal consequences. 

The wise path is to engage advisors early to help navigate the challenges, protect personal
interests, and, if viable, avoid the value destruction of liquidation altogether. 

Those who heed the warnings and get prepared have the best chance of surviving the
liquidation minefield intact, or depending on circumstances, even secure other options that
enable second chances, such as Voluntary Administration.

How AVA Advisory can help

The mission-critical action, however, is not waiting until your options are limited by legal
circumstances. If your company is experiencing financial or operational distress, proactive early
intervention is always best because the more time you have, the more solutions you have available.

If you need to discuss your options and develop a strategic plan for moving forward, contact AVA Advisory by calling 1300 181 220 or book a confidential, no-strings-attached
consultation through our online platform.

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Solid Foundations: Protect Your Construction Business in Challenging Times

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