Business, Director, Insolvency

Business, Director, Insolvency. Before deciding to liquidate, speak with restructuring and turnaround practitioner Eddie.

Business, Director, Insolvency – 3 key words that are likely to come up often in 2021. 

Small businesses make up 98% of Australia’s economy. According to the World Bank in 2017, they represent about 90% of businesses and more than 50% of employment worldwide. Micro, small and family enterprises play an essential role in most countries around the world, especially in emerging markets. Despite the economic importance of small businesses, most insolvency jurisdictions do not provide adequate resources to those facing financial distress and insolvency. I am sorry to say that Australia is indeed one of those jurisdictions.

One of the major problems for small businesses in Australia surrounds business debts that pierce the corporate veil. Let us go back to basics. The concept of a limited liability company is purely that – to establish a separate legal entity and limit liability whilst the directors undertake calculated risks to generate profit for the Company. The shareholders are the true owners and bear the highest risk – but they can only ever lose the amount which they invested in their shares. The separate legal entity concept was underlined by the landmark UK case of Salomon v Salomon all the way back in 1897.

Back to reality – the situation is completely different for small businesses in Australia. Often with a family business, the directors are also the shareholders. The directors are encouraged to borrow, employ and train staff and pay taxes. Initial working capital is often injected personally or sourced from family and friends at the outset. At the start up phase, the directors naturally focus on the positive. Put simply, the small business director is determined this family business will be a success.

Then, as work begins to arrive, the small business owner may look to the bank for a business loan. The ‘eager’ bank registers security against the company (an ‘ALLPAAP’ on the PPSR – which gives them super priority if things go wrong) and, as an extra safety net, they will look to the equity in the business owner’s family home as additional collateral.

So, whatever happens, we absolutely must keep the bank happy. Otherwise, we joke, we could find out that we are suddenly homeless and living on the street. Next, the business may need some vehicles and/or plant and equipment. Easy. Plenty of financiers out there willing to lend. However, in signing the lease agreement, the directors almost always personally guarantee the company’s performance to repay the loans (plus costs and interest if there is a breach). Financiers will register a security interest, on this PPSR thing again, against any vehicles and equipment they have lent against.

Business, Director, Insolvency

The small business owner finds the ideal premises from which to operate. Plus, the landlord has been a sheer delight to deal with. A thoroughly nice individual and highly accommodating. However, the landlord directs you to the appointed property agent for the ‘paperwork’. Which you discover is a 75-page lease agreement including, you guessed it, another personal guarantee. Should the director seek legal advice before signing? Yes. However, 75 pages would mean a hefty legal bill and the business urgently needs premises – no time to shop around.

There are always the suppliers – the sales reps are keen to land new business. The reps can’t do enough for you. They are fully committed to supplying and also extending plenty of credit. There’s one provision though. The director must sign a credit agreement. Which contains yet another personal guarantee. The suppliers register their security interest on the PPSR accordingly. The director needs supplies urgently and so swiftly signs the necessary forms to obtain stock, goods and services. The director might sometimes miss the fact that a caveatable interest has been unwittingly been granted too. This also enables the supplier to use the director’s family home as collateral (they sit, patiently in line, behind the bank). When supplies are held up, delayed or in high demand, perhaps due to COVID, the director naturally heads to the nearest competitor. Supply problem solved – but another personal guarantee signed.

A lot has been said about larger enterprises abusing smaller suppliers by deliberately delaying payments in a bid to boost their own cashflow. The Australian Small Business and Family Enterprise Ombudsman ( undertook the ‘Payment Times and Practices Inquiry’ and the findings clearly identified deliberate tactics are being used to the detriment of small businesses. In short, our small business director discovers that he is expected to be paid 90 days after issuing an invoice to customers. Does not seem to add up – our director’s larger suppliers have strict 30-day payment terms? What about the 60-day gap?

Then there are the usual hurdles to face when employing staff. You need the help but contracts of employment must be drawn up, workers compensation paid, WHS compliance, supervisory arrangements and, importantly, ongoing training. After fumbling around to get single touch payroll in place, the small business director may easily discover that the company has accumulated unpaid superannuation. Wasn’t this supposed to be the accountants job? Or was it the bookkeeper you employed? Regardless of the fact it was an accident, it attaches to the director personally.

Inadvertently, our small business director falls behind on payment of PAYG and GST. Too busy trying to win work, remain compliant and supervise the staff. That is okay though, the director takes the accountant’s advice and contacts the ATO to arrange a payment plan. Now, didn’t the accountant also mentioned something about a cashflow forecast and budget? This was definitely part of their scope of works. Although, truth be told, our director does not need a fancy detailed financial guestimates. The high-level figures are rolling around the director’s head constantly and causing sleepless nights.

Finally, the accountant receives a statutory demand at their office and recommends that you speak with a registered liquidator. It is beyond the accountant’s field of expertise and it needs an insolvency specialist. The liquidator’s recommendation is that the director liquidate (no surprise there) and all the problems will disappear once the company is formally wound up. They ask for an upfront $11k GST Inc to be paid into their trust account as a contribution towards fees. With cash in the business exhausted, the director is forced to pay this personally.

Unfortunately for our small business director, his real problems have just begun. The liquidation deals with the debt on the corporate level (so the less sophisticated and trusting small suppliers, with whom you have built a relationship, can only now hope for 2 cents in the dollar over perhaps the next 3 years – that’s your close business contacts burned for good and probably your career finished too).

Business, Director, Insolvency

So, the real pain arrives shortly after the liquidator is appointed. Family and friends who initially provided loans to the company want to know when they can expect their money back. The bank comes knocking for your proposals on repaying the business loan (secured against the family home). The notion of homelessness is now far from being a joke – it’s just become a real possibility.

The landlord’s agent aggressively pursues our director personally for unpaid rent and for breaking the commercial lease agreement. The financiers come and repossess all the vehicles and equipment for auction/firesale and then claim against the director personally for the additional costs, charges and interest that were incurred in the process. The larger suppliers commence legal proceedings against the director personally too. There is still that superannuation payment plan to adhere to. Then, suddenly, the director receives at their home address a lockdown ‘director penalty notice’ from the ATO. It says that the director is now personally liable for the company’s unpaid PAYG/GST now too.

A stern letter from the liquidator arrives. There are multiple accusations of poor director conduct, something about director related transactions and a whopping compensation claim for insolvent trading? Our small business director now needs personal insolvency advice. The liquidator recommends speaking with a trustee about bankruptcy.

Fortunately, there is an alternative to blindly heading down the liquidation or administration route. Speak with a restructuring and turnaround advisor. Eddie Griffith of TurnAbout AU and Chairman of the Association for Business Restructuring and Turnaround ( says the primary focus should be to simultaneously deal with issues the small business director is likely to face on the corporate level AND the personal level.

Eddie says his professional advice covers multiple complex areas of financial distress and insolvency. He helps navigate the corporate landscape (troubleshooting & crisis management, director duties, safe harbour protection from insolvent trading, liquidator recovery provisions etc) but, most importantly, advises the small business director on the personal ramifications of heading down the liquidation or administration route. As said by insolvency academic Jason Harris, when it comes to small businesses and insolvency “An ounce of prevention is worth a pound of cure.” Eddie offers obligation free consultations and has a successful track record in assisting South Australian businesses.

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