What happens to a Director of a Company in Liquidation?
When a company goes into liquidation in Australia, the director loses control over the company’s affairs, assets, and operations. These responsibilities are handed over to an appointed liquidator. Directors must cooperate with the liquidator and provide any requested information, documents, and assistance to facilitate the liquidation process.
The liquidator will also investigate the director’s conduct, to determine whether they engaged in insolvent trading or breached their duties. If the liquidator identifies misconduct, the director could face civil or criminal penalties and, in some cases, may be disqualified from managing companies in the future.
ASIC’s latest data indicates a 36.2% increase in company liquidations from the previous 9-month period. If you’re facing liquidation, book a free 30-minute consultation with Macmillan Lawyers and Advisors to get professional advice and guidance to help you manage the changes in your business.
The Director’s Role in Company Liquidation
When a company enters liquidation, directors need to plan and prepare for the liquidation, suspend their duties as director, and assist the liquidator throughout the process. Let’s examine these roles and responsibilities in detail:
1. Preparing for Liquidation
Directors have a duty to take prompt action when facing insolvency. The first step is doing an honest assessment of the company’s financial health. This evaluation involves reviewing the company’s financial status and records to identify signs of distress.
The director should seek professional legal advice once signs of distress are identified. Law firms like Macmillan Lawyers and Advisors will be able to advise you on the best way forward for your business.
It’s also the director’s responsibility to make sure all legal obligations are met, and that the company remains compliant in every way. This will prevent further liabilities. Lastly, the director should take an active role in developing a liquidation plan that helps mitigate risks and preserve the company’s reputation throughout the process.
2. Immediate Suspension of Directorship
With the appointment of a liquidator, the director’s powers are immediately suspended. The liquidator takes control of the company and its affairs, and directors may not act in any directorial capacity during the liquidation of a company.
3. Obligation to Assist the Liquidator
Once the liquidator takes over, the director must assist them by:
- Supplying accurate and complete records to facilitate the liquidation process
- Promptly addressing any questions or requests for information
- Adhering to the Corporations Act to avoid potential penalties
If the director does not fulfil these obligations, it can result in serious consequences. Directors failing to comply could face personal liability for company debts, civil penalties, or disqualification from managing corporations in the future.
Consequences for Directors During Liquidation of a Company
Directors can face financial, legal, and personal consequences during the liquidation process. These consequences can have long-term results outside liquidating the company.
| Consequence | Description |
|---|---|
| Financial | Personal liability for company debts |
| Legal | Director penalty notices Parallel liability |
| Personal | Damaged credit rating Leadership restrictions Reputational damages |
Financial
Personal Liability for Company Debts
Directors may find themselves personally liable for company debts under certain circumstances. If they’ve provided personal guarantees for company loans or obligations, creditors can enforce these guarantees, potentially leading to personal financial loss.
Under the Australian Taxation Office’s Director Penalty Regime, directors can be considered personally liable for unpaid wages and unpaid company tax obligations, such as Superannuation Guarantee Charge (SGC) amounts and Pay As You Go (PAYG) withholding. This liability continues even after the company has entered liquidation.
Directors may also be held personally liable for debts incurred if they continued to trade while the company was insolvent. Insolvent trading happens when a company incurs debts knowing that it cannot pay the debts as they fall due.
If a liquidator determines that insolvent trading has occurred, they can pursue the directors for compensation equal to the amount of the unpaid debts. This can place the director in significant financial difficulties.
Legal
Director Penalty Notices
A Director Penalty Notice (DPN) is a formal notification issued by the Australian Taxation Office (ATO) to company directors. Essentially, this notice means that the ATO holds the directors personally liable for specific unpaid company tax obligations.
Upon receiving a DPN, directors have 21 days to address the company’s outstanding tax liabilities. If the directors do not act within this period, the ATO will initiate legal recovery proceedings against the director personally.
Parallel Liability
Parallel liability means both the company and its directors are simultaneously liable for certain debts, including taxes. In the context of DPNs, this means that the company’s tax liabilities and the director’s penalties are parallel in nature.
If a company has multiple directors, each director can be held equally responsible for the unpaid amounts. The ATO may pursue recovery from any or all directors, depending on individual circumstances.
Any payment made by the company or a director towards the debt reduces the corresponding liability for all parties involved. Fast action to address outstanding tax obligations is important to mitigate personal risk.
Personal
Damaged Credit Rating
Although liquidating a company does not directly impact a director’s personal credit rating, it can have indirect effects. For example, if a director has provided personal guarantees for company debts, failure to meet these obligations can adversely affect their creditworthiness.
If you’ve been involved in multiple company liquidations, this may be noted in credit assessments, and it may influence future financial dealings. This can also impact your financial reputation, possibly making it harder to get loans or credit in the future.
Leadership Restrictions
Post-liquidation, directors may face restrictions on their ability to serve in future leadership roles. Moreover, persistent non-compliance with legal obligations can disqualify you from becoming the director of another company in the future.
Reputational Damage
Having participated in a company’s liquidation can tarnish a director’s personal and professional reputation, potentially affecting future career prospects. Stakeholders may perceive directors of liquidated companies as high-risk, which can decrease opportunities in business and employment.
Support and Resources for Directors
Facing company liquidation in Australia can be a challenging experience for directors, but there are numerous support services and resources available to assist during this period.
The Australian Securities and Investments Commission (ASIC) provides comprehensive guidance on insolvency for directors, detailing legal obligations and the various forms of external administration, such as voluntary liquidation and voluntary administration.
Professional advisory firms, including Macmillan Lawyers and Advisors, offer specialised services for corporate insolvency and liquidation. Book a free call today and let us guide you through the process, to make sure you stay compliant with legal requirements and strive for the best possible outcomes for all stakeholders and shareholders.
Engaging with these resources early in the process can help directors deal with the complexities of liquidation, fulfil their legal responsibilities, and work towards an equitable resolution for creditors, shareholders, and other involved parties.
FAQs on What happens to a Director of a Company in Liquidation?
Is liquidation the director’s fault?
Not necessarily. Company liquidation can happen due to various factors, such as market conditions, economic downturns, or unforeseen financial challenges. Although liquidation is not specifically the director’s fault, if they’ve engaged in misconduct they may be held personally liable for the company’s debts. This misconduct can include insolvent trading, failing to keep proper financial records, or breaching their fiduciary duties.
How are creditors paid back when a company is liquidated?
In Australia, the Corporations Act 2001 outlines the order for creditors to be paid during a company’s liquidation:
- Secured Creditors: These creditors hold security interests over the company’s assets and are typically paid first from the proceeds of asset sales.
- Priority Unsecured Creditors: This category includes employees owed wages, superannuation, and other entitlements.
- Unsecured Creditors: Suppliers, contractors, and other parties without secured claims fall into this group. They may receive partial repayments, depending on the remaining funds, after higher-priority creditors have been paid.
- Shareholders: Equity holders are last in line and usually receive distributions only if all creditor claims have been satisfied, which is uncommon in insolvency situations.
This structured approach allows for an orderly and fair distribution of the company’s remaining assets among its creditors.
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