If you are a business owner, or more specifically a company director you may find yourself in an enormous amount of debt and are wondering whether you should file for bankruptcy or put your company into liquidation. In an attempt to get your head around this problem you may talk to your accountant or financial advisor and get a greater idea of what to do.
Put simply, in Australia, bankruptcy generally refers to an individual who has debt and needs to file for bankruptcy. Liquidation is essentially when a company has debt and needs to go bankrupt, but it’s a different process called liquidation.
There are pros and cons for both options, but choosing the right one can be very difficult and confusing. Almost everyday it seems we get a call from someone who has been given bad advice and has chosen the wrong insolvency option. For example the most common one is a company director will put their company into voluntary liquidation only to find out later that they personally guaranteed many of the debts and ended up bankrupt anyway. Why this happens is actually pretty simple, a company director finds themselves in an impossible situation so they call their accountant and ask what to do, their accountant says, to protect yourself personally from any liability you want to put your company into liquidation, call a liquidator.
As a typical example this is how this normally goes. A company director lets call her Susie, she runs a bakery will call our office. She tells us she is in $160,000 worth of debt. We ask what sort of debt it is? She responds, well I owe the Franchisor, the ATO, Rent for the Shop, a few credit cards, a business loan, and some suppliers. Susie, of course is wanting to liquidate her company because she doesn’t want to go bankrupt. We then ask her if she knows what debts she has signed personal guarantees on? She responds all of them except the tax debt. Because liquidation is very expensive comparatively to bankruptcy we advise her that liquidation might not be the best option because of her personal guarantees. In other words the only debt liquidation will wipe out will be the ATO debt because she hasn’t received a Directors Penalty Notice as yet.
So if you are trying to decide whether bankruptcy or liquidation is right for you then consider what type of debts you have. Remember there is much more to this story this is just one aspect of how you may be liable for company debts so get some professional advice before you jump in.