When Liquidation becomes personal.
You’ve probably heard this from a client or two in your time: “My company is going into liquidation. What happens to my personal liabilities?”
So, what’s your answer?
Getting the news that your client’s company is on the verge of collapse is never something you want to hear, but if it does happen, it’s important to understand exactly where your client stands.
As an accountant or lawyer, you’ll be familiar with the choice many business owners make to operate in the form of a company rather than a sole trader. As you know, a company is classed as its own legal entity, thus giving the company, the ability to do almost anything an individual person can, including incur debt. Compared to a sole trader, the way a company is structured creates a separation between the business and the company’s owners and operators. Therefore, the debt incurred by one party is separate to the other parties, and vice versa.
Accordingly, should your clients’ company incur significant debt and subsequently be placed into liquidation, only the debt owed by the company will be resolved. The amounts owed to creditors by the company will now be handled by the liquidator. However, if your client has personally guaranteed any of the company’s debt, they will remain liable for these amounts.
It’s also important to note that personal guarantees provided by a director may still be enforceable, even after the resignation of that director. However, this depends on the terms of the guarantee, as each guarantee will have different terms.
The type of debt owed by the company can impact the personal liability of the directors and how the collection of this debt is enforced. For example, a DPN (Director Penalty Notice) can be issued to a former director for PAYG and superannuation payment debts that were incurred at the time of their appointment, provided that the circumstances for the ATO to issue the DPN are met. Check out our video on 3 ways you can reduce your chances of receiving a DPN.
Your client may also be liable for insolvent trading, director/shareholder loan accounts or unreasonable director-related transactions from the liquidator.
Unless your client declares bankruptcy, they will still be liable for the debts they have incurred personally, such as personal credit card debt and loans they may owe to the company.
So, if your client goes bankrupt, what happens to their company?
Once your client has declared bankruptcy they will no longer be allowed to continue operating as a Company Director. All previous responsibilities over the company and all shares held in the company are now assigned to the Bankruptcy Trustee.
There are certain situations where the trustee may see the possibility of a realisation for the benefit of the creditors. They may then use their authority to either sell the company shares held by the bankrupt party, or have the company placed into liquidation.
If the trustee is unable to see any commercial value in liquidating the company, they may decide not to take any action in this regard. If this occurs, creditors are then given the ability to lodge a winding-up application against the company, with the Court then going through the proceedings of placing the company in liquidation.