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Insolvent Director

Newsletter-4

Increase the speed of the director’s financial recovery

  • Company liquidation can have severe consequences for the company\’s director. This typically happens when company debt washes off on to the director, causing the director to also become insolvent. This potentially exposes the director to personal problems, relationship breakdown and ongoing financial hardship.

OBSERVATION: It can take years for the director of a failed company to recover, having a significant impact on the director\’s life and wellbeing.
Financial recovery is not just about resolution of the debt that cannot be paid. It is also about how long it takes before the director can hop back on the horse to get going again. COMMENT: Minimising the time it takes for the director to get going again is an important component of the director\’s financial and personal recovery.
Insolvent trading claims by liquidators can take years to surface, and it is very difficult for the director, essentially left hanging, waiting and unable to go forward with his or her life – not knowing if an insolvent trading claim will surface. TIP: If a director places the insolvent company into liquidation and then becomes bankrupt, he or she is protected from the liquidator commencing an insolvent trading claim at some time in the future. The liquidator is limited to lodging a claim against the bankrupt estate.
Common liabilities that fall on a director from company failure are:

  • Personal guarantees
  • Insolvent trading claim by liquidator

It can be difficult for the director to regroup and get going again due to debt from the company\’s past hanging over the director. Issues often experienced include:

  •  personal guarantees have been given but the creditor has not yet pursued collection of the debt,
  • the director cannot recall who personal guarantees were given to and personal guarantees keep coming out of the woodwork,
  • the company has been placed into liquidation but there is no word on whether the liquidator will be commencing an insolvent trading claim. (It can take years before a liquidator commences an insolvent trading claim)

COMMENT: Personal guarantee liabilities and a liquidator\’s insolvent trading claim (even if it takes years for the liquidator to commence an insolvent trading claim) are caught by the director\’s bankruptcy. In Taylor v Rudaks (2007) FCA 1962 it was held that an insolvent trading claim by a liquidator constitutes a liquidated claim from statute that is provable in the bankrupt estate of the director.

COMMENT: By releasing the ex-director from the debt, bankruptcy is akin to recapitalising the director back to ground zero and gives a timeline for when the company\’s problems will no longer implicate the director\’s life. During bankruptcy the director can save without limit in his or her ordinary bank account for a future business endeavour.

TIP: It can be in the director\’s best interest to put the company into liquidation before filing for bankruptcy to ensure an insolvent trading claim by the liquidator is caught by the director\’s bankruptcy in a timely manner.

EXAMPLE: A company is placed into liquidation and the insolvent director then files for bankruptcy. Two years later the liquidator commences an insolvent trading claim – all the liquidator can do is lodge a claim with the bankrupt estate and is not able to pursue the ex-director for the debt. By this point in time, the ex-director is only one year from being discharged from bankruptcy. If the director had not filed for bankruptcy, he or she would need to file for bankruptcy upon receiving the liquidator\’s insolvent trading claim, some 2 years down the track – causing significant delay for the director\’s financial recovery.

PART 4 AGREEMENT: During bankruptcy, if a superior business opportunity presents itself to the ex-director, he or she can propose to creditors a commercial offer under Part 4 of the Bankruptcy Act that gives creditors a better result than bankruptcy. If creditors accept the offer, the protection from creditors which bankruptcy provides is maintained and the bankruptcy is annulled – allowing the ex-director to pursue the business opportunity.

TIP: A Part 4 Agreement is binding on all creditors who were caught by the bankruptcy and returns the person to be able to be a director of a company and trustee of a self-managed super fund.

TIP: A Part 4 Agreement can be proposed at any time during the 3 years of bankruptcy.

Creating a plan for the director’s financial recovery can be time well spent.

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