When a company director calls and says “I am going to declare myself a bankrupt” it helps to know the exact implications of this decision.

The question “What happens to my company if I go bankrupt” will certainly come up. What are the implications for the directorship and shareholding of the company?

Below are detailed the implications for directorship and shareholding if you go bankrupt.

What happens to directorship if you go bankrupt?

Once a company director is declared bankrupt, he or she will be automatically disqualified under section 206B of the Corporations Act from holding any directorship position in companies or exercising any powers in managing a company.

It should be noted that it is an offence to continue to act formally or informally in managing a company.

What happens to shareholding?

The bankrupt individual’s property vests in the trustee of the bankrupt estate, including any shareholdings in private companies.

Under the bankruptcy law, the trustee has the right to request the company’s financial statements in order to assess the net asset positon of the company to determine the equity of the shareholdings.

Upon the assessment, the trustee has the following options available:

  • Realise the shares – if the company has a net asset position, the trustee has the option to realise the shares so the funds can be returned to shareholders (including the bankrupt estate). If there are multiple shareholders, the trustee will generally seek to sell the bankrupt shareholder’s interest in the company to the exiting non-bankrupt shareholders.
  • If the company is insolvent, it may be necessary for the company to be placed in liquidation, in order to recover any monies owed to the bankrupt estate.
  • The trustee may not take any action or disclaim the bankrupt shareholder’s estate interest in the shares, if the company is dormant and or asset-less.

The company is a separate legal entity, so a director has no legal obligation to pay the company creditors unless they:

  • Have a personal guarantee
  • Have received an ATO Director Penalty Notice, or
  • Is directed to by the courts (for example, for insolvent trading)

The trustee may ask for assistance in regard to a company’s affairs in order to help deal with the shareholdings.

This is where Rapsey Griffiths can help. If you have any technical questions regarding what happens to a company if a director goes bankrupt or want to discuss a particular case, we are here to provide professional assistance as required.