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Various activities and debts may penetrate the corporate veil and leave directors personally liable, which can potentially result in a company liquidation extending into personal bankruptcy.
Regardless whether or not directors have taken due care and remedial action to resolve financial problems of the company, there are various liabilities which may initially be company debts but ultimately result in personal liability. These include but are not limited to-
· Personal guarantees on company debts/credit
For claims to be made by creditors under personal guarantees they do not require a company to be in liquidation. When a personal guarantee is in place they are a secured creditor, secured by personal guarantee. The creditor may exercise any provision which may fall within the guarantee initially agreed upon by both parties.
· Void/Unreasonable director related transactions
These claims are also made by the liquidator when the company is in liquidation.
· Insolvent Trading
Insolvent Trading claims are made by either liquidators or creditors. Through investigation into the financial affairs of a company whilst in liquidation, the liquidator may discover evidence of insolvent trading. (See Below). The director then becomes personally liable for any shortfalls in which the liquidation of the company does not cover to creditors if found guilty of insolvent trading.
· Loss of employee entitlements
Employees are a priority creditor as termination of their employment will terminate their source of income in most cases.
· Unpaid Taxation/Superannuation debts
These liabilities may potentially penetrate all protection structured around protection of directors i.e. Directors of corporate trustees through discretionary trusts etc.
If a company can pay its debts when and as they fall due they are solvent, if not- they are insolvent. It is the responsibility of the director to have full awareness of their financial position and to have clear knowledge and reasonable grounds to suspect whether or not the company is trading whilst insolvent.
If a company is found to be trading whilst insolvent, the director/s will be held personally liable for the shortfalls of debt which the company is unable to pay. The liability may fall within the director, however if there are parties carrying out directive duties without being officially appointed as a director, the liability also rests with them. These are called “De facto directors” or “Shadow Directors”.
For more information on consequences of bankruptcy contact our bankruptcy lawyers.