My Client's Company Is Insolvent - Do They Have to Put it into Liquidation?
If your clients company is clearly insolvent, what should they do next? Plenty of Insolvency Practitioners would tell you the director must put the company into liquidation or administration as soon as possible. That is not the case.
What does the law say?
The law does say that in a situation where a company is insolvent, the directors responsibility is to ensure the company does not incur further debt. So stopping the company from trading takes care of that. But there is no legislation that definitively says a director of an insolvent company must place the company into liquidation.
What does ASIC say?
The ASIC guide on the subject says “Unless it is possible to promptly restructure, refinance or obtain equity funding to recapitalise the company, generally your options are to appoint a voluntary administrator or a liquidator.” So ASIC is encouraging, but not requiring, a director to put an insolvent company into liquidation.
What does Dissolve say?
You’ll see where we are heading. There’s a third option – do nothing! It is a an option to stop trading and just let the company sit there, waiting to see if a creditor goes to court to put the company into liquidation, or eventually for ASIC to strike it off for being dormant. In fact, we commonly tell callers to our Insolvency Hotline that they should only spend the money on a liquidation if they see a benefit from doing so. The main benefits of liquidation include:
- Removal of Stress – Once the company is in liquidation, the creditors can’t hassle the directors about company debts anymore. All responsibility for future reporting and company maintenance is lifted.
- Ends Court Cases – Any pending court actions stop on the date of liquidation.
- Protection of Personal Assets – Liquidation can stop the tax office from chasing directors personally with a Director Penalty Notice.
- Provides a Definitive End to the Company – Directors can clearly show, and know, the company is closed, allowing them to move on.
They are sometimes compelling reasons. And number 3 is a big one. Where there is a possible liability under a 21 Day Director Penalty Notice (more information over at our sister site DPN Solutions) then we strongly recommend that a director does put the company into liquidation. Doing so makes it certain that the director can’t be liable under the 21 Day DPN. We have seen many times the situation where a director didn’t put a company into liquidation, the ATO sent a 21 Day DPN to the company (sometimes to an old and long forgotten address) and the director ended up being personally liable under the DPN.
Here at Dissolve we give directors and their advisors genuine advice on their options. Many Liquidators try and “sell” a liquidation, and recommend one in any circumstance. We take a longer view, especially with advisors. We hope that if we save your client the cost and hassle of a liquidation this time, you’ll think of us next time.