Due to recent changes made to insolvency laws in light of the COVID-19 pandemic, your company can't be wound up and you can't be bankrupted without having six months' notice. As a director, you also won't be liable for insolvent trading for six months from 25 March 2020.
This doesn't mean you should delay looking at your business and considering your options if you're in significant financial distress. Rather, you should take advantage of the time you now have to properly assess your position and work out the best way to try and protect your business and your personal assets.
Directors should also realise that there are a range of other legal actions that could be taken against them if their company goes into liquidation which have not been suspended and need to be considered when assessing the business.
Increasing business liabilities will become personal liabilities
For a lot of SME owners, their personal finances are bound up with their business. A lot of your business debts (bank loans, major suppliers and landlords) will be guaranteed which means if your business can't pay you will have to pay these debts yourself.
Aside from the ability to potentially negotiate with your landlord to reduce your rent, most other proposals at the moment are to defer the payment of these debts. How long you might get to pay will vary but all deferred debts have to be paid eventually.
If you have guaranteed these debts you will also be personally liable for these deferred debts. With most guarantees, you will also be personally liable for interest and any legal costs on top of these debts as well.
A lot of tax obligations (PAYG, GST and superannuation) of the business also become personal liabilities of the director as well under the director penalty regime.
While you can defer your tax debt for a period of time in the current crisis, it does have to be paid eventually. If your company is unable to pay these tax debts you could become personally liable to pay these debts yourself by way of a director penalty notice.
This means that in six months' time when a lot of these deferred debts are due and bankruptcy can be more easily pursued the amount owing will be unable to be paid from the business and you will have to pay it personally or go bankrupt.
Most likely the amount of these debts will have increased substantially over that period of time.
Other legal actions
Insolvent trading is the most well-known claim against directors of liquidated companies. However, there is a large range of other claims that can be bought against directors. This includes:
- claims for unreasonable director related or uncommercial transactions where it is claimed the company should not have entered into certain agreements because they were not in the interests of the company;
- Breach of director duties – this can include a large number of issues where the company has suffered loss because of your actions as a director (this may effectively include some of the losses that would normally be claimed under insolvent trading).
The cost of delay
If your business is at risk then delaying any action means you increase the risks of losing your business as well as your personal assets.
What to do
Use the time you have now to properly assess your business and consider your options. Acting early greatly increases the odds of a successful outcome for your business and yourself.
The first step is to take stock – look at your business, do a proper analysis or get some assistance to work out your business position and your personal position and what the effects will be on your business as well as you and your family.
In doing this work you should identify which debts you are personally responsible for and which are company debts only.
Once you have that information we can then start considering options such as:
- Entering into informal agreements with creditors to allow the business to continue trading;
- Entering into formal administration with a Deed of Company Arrangement;
- Closing the business down in an orderly fashion;
- Liquidating the company;
- Entering into informal agreements with creditors to protect yourself if the company cannot continue; and
- Considering personal insolvency options such as proposing a Part X agreement or bankruptcy.
If you have done the first step properly then it's possible to start mapping out what the outcome of each option set out above would have on your company and your personal position.
Once you have that information you can then make informed decisions about how to proceed, what to try first and how to develop back up plans if your first options don't work out.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.