Some common misconceptions by directors: The Corporate Veil; “Doing the right thing” by creditors; The ATO is not actually a creditor.
We get a lot of calls from directors and there are three misconceptions or errors that constantly raise their head. Firstly, everyone knows that a company is a separate legal entity to the directors and shareholders, right? Errr….Wrong. Well when I say “wrong” I mean that the concept is right but I am constantly amazed at the number of directors that are unaware of the concept. Secondly, there are a similar number of directors that have the view that they have to “do the right thing” and ensure that all creditors are paid. I like the concept, but the practicalities of that approach often escape the reality check. Thirdly, if I were to ask the average director who called who their creditors are, less than 50% would volunteer the ATO as creditor, whereas the ATO is a creditor in about 95% of matters.
So let’s have a look at the misconceptions one by one.
The Corporate Veil
This is possibly telling many people the obvious but, a company is a legal entity in its own right. It’s not the director, it’s not the shareholders. And no, Directors are not automatically personally liable for all of a company’s debts. We have that conversation a lot. The misconception usually springs from a misunderstanding of Insolvent Trading Laws. Yes, a director can become personally liable for a company’s debts in certain situations – Insolvent Trading , Director Penalty Notice, by Contract, by written Personal Guarantee – but those are specific situations that sometimes, only sometimes, apply.
Doing the right thing
It is an admirable trait of the small business person that the majority want to do the right thing and ensure all creditors get paid. I have to say that it is a trait I witness often at the small end of the market but have yet to encounter at the big end of town. At the big end of town, the directors have very firmly grasped the concept of the Corporate Veil. Don’t get me wrong, I am not criticising the concept, as it is clearly the right approach. However, by the time a director calls me, in the majority of cases there is no prospect of all creditors being paid unless the fairy godmother enters the scene with her magic wand. When I receive a call, the conversation is rarely about getting everyone paid. I have to quickly redirect the conversation to be about resolving the situation such that, hopefully, all those involved are a little less unhappy than they would otherwise have been, or it may be a matter of simply bringing the pain to an end so everyone can move on.
The ATO is a a creditor too
When asked, the average director will list their creditors as the landlord, some suppliers, probably some Superannuation. Our standard follow up question is “what about the ATO?” . “Oh the BAS is about $250,000”. So, in case there is any doubt, when there is a tax debt, the ATO is a creditor as well.