Making the right decisions for your business when you’re facing financial difficulty can be tough – especially when you’re being chased for payment, trying to get cash in, and feeling isolated and overwhelmed. Fear, uncertainty and questions abound.
Knowing the answers to these questions can help remove some of the uncertainty and get you in a better headspace to deal with the issues effectively. Here are some of the most common questions we hear, with our answers below.
- Will I go bankrupt and lose my house if I appoint a liquidator?
- Can I save my business?
- Will the tax office come after me personally for my company’s tax debt?
- What happens if I just keep trading or do nothing?
- Can I keep my cars, which are in the company?
- My company owes me money, can I pay myself?
- How will a company insolvency appointment affect my personal credit file?
- What are the options for my business?
- Can I start another company?
- How do I deal with a liquidator‘s claims against me?
1. Will I go bankrupt and lose my house if I appoint a liquidator?
No. Your company and personal financial affairs are separate.
Appointing a liquidator to your company doesn’t directly impact your personal finances or mean you’ll go bankrupt personally.
However, while company debts generally remain with your company, there are several situations where you can be held personally liable for your company’s debts. Some of the most common are:
- Insolvent trading – Insolvent trading is when your company continues trading while insolvent and you run up debts you cannot pay. It’s important to seek assistance if your company is struggling to pay its debts.
- Superannuation and BAS debts owed to the ATO – A director can be held personally liable for these debts under an ATO director penalty notice. Liquidating your company can avoid personal liability for these debts as long as BAS and super guarantee charge returns have been lodged on time.
- Personal guarantee debts – Often directors are required to guarantee their company will pay its debts. Such agreements often include premises leases with landlords, trade suppliers and loan and finance debts.
- Director loan account balances – If you take your pay as drawings, this balance is recorded as a loan account. It may therefore be recoverable by a liquidator. This is a common tax-saving setup.
There are also several less common claims you can be held personally liable for, including illegal phoenix activity and unfair dismissal.
If you’ve provided guarantees or keep trading and become personally liable for the above debts, you may be forced to refinance or sell your house to pay them – or look at personal insolvency options, such as bankruptcy.
It’s important to remember that by continuing to trade without professional advice and a restructuring plan, you’re probably making your situation worse.
2. Can I save my business?
Yes. If you’re reading this, you’re on the right track.
The first step to saving your business is to assess whether it’s viable. In other words, does it have the potential to survive and thrive?
If there’s any question about your company’s ability to meet its debts, you may be insolvent. Seek professional advice from a restructuring advisor to determine whether a turnaround or restructuring plan should be implemented.
If your business is no longer viable, a common aftereffect of COVID-19, you should take steps to wind down and close, avoiding further loss. We can guide you through this process and be appointed as liquidator to finalise your company’s affairs.
The good news is, if your business is facing insolvency, it doesn’t have to be the end of the road. If you act early, there are a number of options to keep your business on the right track, including:
- Informal turnaround, which may include refinancing and creditor negotiations and/or an ATO payment arrangement. If undertaking this course of action, you should consider implementing safe harbour protection.
- A small business restructure, newly introduced from 1 January 2021
- Voluntary administration in order to propose a deed of company arrangement
- Selling your business – possibly to a related entity – before or following the appointment of a liquidator or administrator.
Don’t wait too long to take action. The ATO or another creditor could begin action to recover their debts from you personally – or wind up your company.
As hard as it can be to get help and save your business, in our experience, worse outcomes arise from doing nothing.
3. Will the tax office come after me personally for my company’s tax debt?
No, as long as you act early.
In some circumstances, directors can be held personally liable for their company’s superannuation and BAS debts owed to the Australian Taxation Office (ATO).
The ATO can seek to make a director personally liable for these debts under an ATO director penalty notice. Appointing a liquidator or administrator to your company can avoid personal liability for these debts:
- for periods where a debt remains unpaid, the respective BAS or superannuation guarantee charge statements have been lodged on time; and
- a director penalty notice hasn’t been issued or, if it has been issued, an administrator or liquidator is appointed within 21 days of the date of the notice.
Director penalty notices are issued to the director’s personal residence, which is recorded with ASIC, so it’s important you keep your details up to date.
In our experience, while the ATO is keen to recover money owed, the primary reason for issuing a director penalty notice is to encourage a company that’s not meeting its lodgement and/or payment obligations to deal with it promptly.
So, if your company isn’t meeting its obligations, and you want to avoid a director penalty notice, deal with your company’s situation before the ATO forces you to.
4. What happens if I just keep trading or do nothing?
Sometimes a company has no money to meet the cost of liquidation, and its directors may not be able to meet these costs either. Because of this, we often see business owners delaying necessary action out of fear and uncertainty. However, worse outcomes usually arise from not acting.
If you do nothing, a couple of things can happen. Either a creditor, often the ATO, will take steps to wind up your company through the court and have a liquidator appointed. Alternatively, ASIC may take steps to deregister your company if it’s non-compliant.
Further information is available in our article on company deregistration and creditor winding up.
5. Can I keep my cars which are in the company?
It’s common for directors’ personal cars to be in their company and subject to finance agreements. This often causes a delay in directors going ahead with an insolvency appointment due to the fear of losing their car. However, this inaction can lead to worse outcomes.
Many financiers will allow your company car to be refinanced into your name personally or possibly into an associated company before liquidation. Where this isn’t possible, you may need to sell your financed vehicle to pay out the existing loan. You can then look to purchase a new vehicle personally or in a related company.
Alternatively, liquidators have two other options:
- If your car is worth more than the finance, the liquidator can sell it to you for fair value and you can pay out the finance; or
- If it’s worth less than the finance payout, the liquidator will disclaim the vehicle (meaning the company has no further interest in it). It’s then down to the financier and you to discuss arrangements for you to keep the vehicle.
6. My company owes me money, can I pay myself?
No, except for wages for your ongoing employment.
Often directors will be owed loans, wages or leave by their company. While it’s tempting to repay these debts, as director, you have duties to preserve your company’s remaining assets and treat all creditors equally.
Employees have priority for their entitlements ahead of other creditors. Directors also have this priority, however, it's limited to $2,000 for wages and superannuation and $1,500 for leave entitlements.
If you’re providing money to your company or not drawing a wage, there are some smart ways to loan money to your company to ensure you don’t lose out.
7. How will a company insolvency appointment affect my personal credit file?
How a company insolvency will affect a director’s personal credit file is a common concern.
If there’s a default, winding up application or liquidation recorded against your company, it will likely show on your credit file. Your bank or a potential financier will certainly have some questions.
If you’re maintaining your mortgage, credit card and car/personal loan payments, these should not be affected. If you’re looking for a new loan in another company or for yourself personally, it may be more difficult. The bank may ask you to provide further financial information, pay a higher interest rate, or offer you less than asked for.
Ultimately, any finance application will need you to demonstrate your income and the ability to service the loan you’re seeking. We work with specialist finance brokers who can assist you in these situations.
This should not delay your decision to deal with your company’s financial difficulties. Doing so may be more costly and could result in claims against you personally, putting you in a much more difficult position to obtain finance.
8. What are the options for my business?
If your company is in financial difficulty, you need to establish that your business:
- is viable to keep trading;
- can manage cash flow to meet day-to-day expenses; and
- can return to a sufficient level of turnover to meet its expenses and pay a wage to you, the director or business owner.
If your business is no longer viable, as is not uncommon post-COVID-19, you should take steps to wind down and close. We can guide you through this process and be appointed as liquidator to finalise your company’s affairs.
If your business is facing insolvency, it doesn’t have to be the end of the road. If you act early, there are several options to keep your business on the right track, including:
- Informal turnaround, which may include refinancing, and creditor negotiations and/or an ATO payment arrangement. If undertaking this course of action, you should consider implementing safe harbour protection.
- A small business restructure, newly introduced from 1 January 2021
- Voluntary administration in order to propose a deed of liquidation
- Selling your business – possibly to a related entity - before or following the appointment of a liquidator or administrator.
9. Can I start another company?
Yes, there’s no restriction on you being a director if your company goes into liquidation.
You're only prevented from being appointed as a director if you become personally bankrupt, enter a personal insolvency agreement as an alternative to bankruptcy, or if ASIC disqualifies you due to issues with your conduct as director.
10. How do I deal with a liquidator‘s claims against me?
A liquidator may have various claims against you, as covered above. Most often these claims are for director loan accounts or insolvent trading. But claims are also available to the liquidator against a director for breaches of directors’ duties or voidable transactions.
If you’re worried a liquidator will pursue claims against you or make you bankrupt, it can be very difficult to proceed with appointing one, even if it’s the right thing to do.
In reality, most liquidator claims are resolved without ending up in court. And just trading on, or delaying action, usually makes things worse. The longer your company trades while insolvent, the greater the potential claims the liquidator, the ATO and personal guarantee creditors will have against you as director.
It’s recommended that you seek legal advice regarding your options to deal with any claim against you. Failure to properly address a claim may result in court action and bankruptcy.
As with any legal claim, there are generally five options to deal with a liquidator’s claims:
- Pay the claim in full
- Offer to settle the claim for less than the full amount
- Dispute the claim
- Provide details of your personal financial position to help the liquidator in assessing if you have the financial capacity to meet a successful claim
- Do nothing, in which case the liquidator will decide whether to pursue the claim further
Individual liquidators have varying approaches to pursuing legal claims. However, where claims aren’t pursued, this is most often on commercial grounds. That means there may not be any expected benefit to your company and its creditors for pursuing the claim, or the benefit may be limited.
There are various other factors affecting whether a claim is pursued, which the liquidator will consider in each case. A liquidator’s primary role is to act in the best interests of creditors, and, therefore, any step a liquidator takes has that duty in mind.
It’s important to note that creditors may fund a liquidator to pursue claims, or they may obtain the liquidator’s consent to pursue insolvent trading for their own debt. Additionally, a liquidator may assign any claim they have to a creditor or other party.
Where you’re concerned about the potential claims that may arise in liquidation, you may consider whether to raise finance from the equity in your property or other sources to avoid it. Such options may include financing a restructuring plan or proposing a deed of company arrangement to wind down the company’s affairs without liquidation.
Being clear on what you can and can’t and should and shouldn’t do if you’re in financial hot water, and understanding your requirements for being director, can ease the stress and help you see more clearly. The overriding advice is to take action straight away – doing this will help lead to best outcomes for you and your business.