CONSIDERATIONS FOR DIRECTORS
Directors' Personal Assets
A liquidator cannot take possession of a director’s personal assets, only a company’s assets. If a liquidator can prove that the directors have taken company assets, the liquidator may then recover those assets. If a company has loaned money to the directors, the liquidator will seek to recover the money, and if necessary may instigate legal proceedings to recover these funds. If a liquidator can establish an insolvent trading claim, they may take recovery action against any directors and, if necessary, commence bankruptcy proceedings against that director. This allows a bankruptcy trustee to access the director’s assets to satisfy the liquidator’s claim.
Personal Guarantees as Part of a Liquidation
When directors, or other parties, execute a personal guarantee, it becomes a personal arrangement between creditor and guarantor, and therefore is not affected by liquidation.
Caveats – Charging Clauses Over Property
Most personal guarantees include a ‘charging’ clause. It provides a ‘charge’ for a creditor, in the event of non-payment, to place a caveat over any real property owned by the director. This makes these creditors a ‘secured creditor’ over any real property owned by the director. The creditor can lodge a caveat over this real property, and if necessary, commence legal action to enforce their caveat, which may ultimately lead to a statutory trustee being appointed over the real property. The statutory trustee will sell the property and distribute the funds, firstly to the secured creditors (mortgagee and caveat holders) with the surplus funds (if any) being paid back to the property’s owners. Clearly, these clauses are a very powerful tool for creditors and one that directors need to be acutely aware of.
Directors Loan Accounts
Directors often make the conscious decision (after receiving advice) to only pay themselves a small salary (or even none) and simply take company funds as a directors’ loan account. The advantage is that directors don’t have to remit any pay as you go (PAYG) to the Australian Taxation Office (ATO). However, in a company liquidation, the first thing that the liquidator will identify is an outstanding loan account and immediately demand repayment. Often it is a significant amount outstanding and the liquidator is obligated to recover the loan account.
Director Penalty Notices (DPNs)
A director penalty notice (DPN) allows the ATO to seek payment of unpaid company Pay as You Go (PAYG) withholding and superannuation from a director. The ‘Director Penalty Notices’ section of this Guide (page 66) details how these DPNs work. Directors must be extremely mindful of DPNs, particularly if they have outstanding business activity statements (BAS) and superannuation guarantee charge (SGC) reporting obligations as they can already be automatically liable for a portion of the outstanding PAYG and superannuation. If directors are issued a DPN, immediately seeking appropriate advice on what they should do, is vital. If they ‘put their head in the sand’—the problem will only get worse.
Director Banning
Section 206F of the Corporations Act gives the Australian Securities and Investments Commission (ASIC) the power to disqualify a director for up to five years if the person is a director (or a director within the 12 months) of two or more companies that have been placed into liquidation in the previous seven years. We are seeing ASIC becoming more proactive on this front and taking more action to ban directors under section 206F.