What Happens To A Director When A Company Goes Into Liquidation

insolvencyCompany Liquidation, Director Liabilities

Being the director of a company experiencing financial difficulties can be scary and unknown. All too often, company directors continue to amass company debt as they view entering liquidation as a personal failure and are terrified of being personally liable for any debts incurred by the company. While in most cases the director is not financially liable for these debts, there is the potential for personal assets to be seized.

As the director you have a duty to act in the best interests of your company, its creditors and its shareholders. The extent to which liquidation affects a company’s director will depend on their practices prior to the liquidation. If upon investigation you have acted wrongfully or unlawfully, you may be personally liable for any debts incurred on the company’s behalf. While there is the possibility of personal liability and loss of personal assets, being the director of a company in liquidation may not be as bad as you fear.

As a director of a company facing financial difficulties, it is essential to understand the potential consequences of entering into liquidation.

Loss Of Director Powers

Once a registered liquidator has been appointed and the directors and members resolutions have been passed, the company has officially entered liquidation. At this point, the decision-making powers of a director are immediately suspended. From this point forward, the appointed liquidator will be directly responsible for all affairs of the company including all the company’s assets as laid out in Section 477 of the Corporations Act.

Despite losing their powers, directors may still be personally liable for any debts incurred by the company if they breached their directors duty, entered a personal guarantee loan or operated unlawfully. Directors may also be required to assist the liquidator as deemed necessary throughout the liquidation process by supplying them with supporting documents, like books and records. Additionally, the director must have a verifiable explanation for every financial move the company has made up to and including the point of liquidation.

Personal Guarantee To Secured Creditors

While in most cases a directors personal assets are protected during the liquidation process, any loans taken with a personal guarantee may result in personal liability. A personal guarantee to creditors is a loan taken out where a person (usually the company director) agrees to take personal liability for the business debts in the event the company can not pay. If the company is unable to repay this loan, the creditor has a direct claim on the guarantor and potentially their personal assets. Even if your company is liquidated you may still be personally liable for its debts. The best way to prevent this from happening is never to sign a loan with a personal guarantee, however tempting it may be.

This is the only type of creditor that may claim to collect their debts once a company has entered liquidation. As a result, liquidation may actually prevent a company and its director from further losses.

Another form of personal liability for directors is if a home equity loan was taken out for the business against the value of your home. These secured loans on your home means that you may still be personally liable to repay the company debts after it is liquidated.

Don’t leave your personal assets up to chance! Contact the Insolvency Experts today to ensure the protection of your personal assets.

Insolvent Trading

If your company is insolvent, your legal duty is to your creditors.

Insolvent trading is the practice of continuing trading as usual and incurring further debt once the company is insolvent. That is, where the company cannot pay its debts as and when they fall due for payment. Insolvent trading is illegal and can occur both intentionally and unintentionally. While internationally engaging in insolvent trading may seem more severe, by unintentionally trading insolvent the director is committing a serious miscarriage of their duties and can still be financially liable. Unfortunately, even if no insolvent trading has occurred, if a director has not kept financial books and records for the 7 year period required, they will have no defence if they are hit with a claim of insolvent trading. Keeping books and records up to date is mandatory. Additionally, directors must take an active role in reviewing a company’s financial records. They must question any inconsistencies and seek professional help if they are unsure of how to proceed.

Breaches Of Directors Duties

As mentioned previously, as the director of a company you have a duty to act in the best interests of your business, its creditors and its shareholders. Failure to do so can result in being personally liable for any debts incurred on behalf of the company.

As a director you are expected to regularly review the finances of the company and take steps to resolve any issues that may arise in a timely manner. Breaches of director duties can involve: insolvent and fraudulent trading, and many other breaches of the Corporations Act.

Insolvent Trading
This occurs when a director continues to trade a company when they know, or should have known that there was no reasonable prospect of the company repaying its debts as and when they fell due for payment. If a director is suspected of insolvent trading they must be able to prove that they took every step possible to minimise loss to the creditors. If the Court determines that insolvent trading has occurred, they can order the director to be personally liable for the company debts with no financial limit. If the claim for losses is high enough, the director may have to file for personal bankruptcy.

Fraudulent Trading
This form of trading involves a director having operated a business with the intention to defraud creditors or any other fraudulent purpose. Examples of fraudulent trading include: entering contracts where you do not have the sufficient funds to complete the undertaking, giving inaccurate information with the intent to deceive and taking deposits for orders you know you are unable to fill. If the Court proves that fraudulent trading has occurred the director may be
personally liable to the debts of the company. Directors may also be imprisoned for up to 10 years, receive a fine, or both.

Misfeasance
This is where a breach of legal fiduciary duties of a director have taken place. Examples of this include: misappropriation of company funds and money improperly drawn from a company. If  this is the case, the Court can order directors to repay and restore these funds or contribute without financial limit to the company debt.

Liquidation may not be the only way out for your company. Voluntary administration is essentially a last-ditch effort to save a company from liquidation by offering creditors a higher return than what they would get if the company was liquidated. Find out if your company may be recoverable through voluntary administration today with help from the Insolvency Experts.

When met with extreme financial difficulty, it is important to understand exactly what options are available to you and what you may be personally liable for. All of these outcomes are possible for all types of company liquidation including creditors voluntary liquidation, voluntary administration and corporate insolvencies. If a director fully understands their duties and performs them in accordance with the Corporations Act, they should have little to worry about in relation to personal liability.

Contact the Insolvency Experts today to receive free expert advice and help you make an informed decision of what is best for you and your company moving forward.

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