COVID-19 FINANCIAL CRISIS – IS LIQUIDATION A GOOD OPTION?

The majority of Australian businesses will face some sort of business interruption as a result of the Covid-19 crisis.  We know directors have been working hard at saving their business, but sometimes, the choice is stark – the crisis has resulted in the company being insolvent and it is unlikely that the business can ever overcome the mountain of creditors.

Whilst the decision is hard, liquidation can provide a number of benefits to a director.

HOW CAN LIQUIDATION BE A GOOD OPTION?

It may prevent you from becoming personally liable for the company’s tax debts.

The Law says that the ATO can, under specific circumstances, make a director personally liable for a company’s tax debts by issues a Director Penalty Notice.  The Law is still there! It has not been removed by the COVID-19 crisis.

It brings to a close the stress and worry of trying to save the business

After you appoint a liquidator, the liquidator deals with all creditors, assets, landlords and the ATO.  The liquidation stops creditors hassling you and gives you the opportunity to move on with life.

The Government may pay your employees

In some cases, there will be no assets or funds available to pay any creditors, including employee entitlements.  The Government’s Fair Entitlements Guarantee scheme (FEG) provides for employees to be paid their entitlements if there are no funds in a liquidation.  The provisions are there as a safety net for employees and, be aware, there are penalties if a director deliberately structures a company’s affairs to access the FEG scheme.  But generally, the FEG scheme is there as a safety net for employees to ensure they are paid their entitlements.

Yes, you can start a new business in the future

There is nothing illegal about having to put your company into liquidation.  There are about 10,000 liquidations a year and that number will likely increase as a result of COVID-19.  There is no automatic banning of a director of a company that enters liquidation to prevent them from continuing as a director of other companies, or becoming a director of another company in the future.  So, if you do need to put your company into liquidation, there is nothing to prevent you starting a new company in 3, 6 or 9 months from now.

It avoids the personal liability that comes attached to the new “government and bank backed loans”.

See the Warning Box below.  It is pointless to take on a new loan to save an unviable business.


WARNING:

Businesses will be offered a variety of special purpose loans from their bank, which are Government backed.  The terms of those loans are, as yet, unclear.  Our advice is:

  • be very wary of accepting new loans to pay past creditors, or to cover future trading losses – at the moment you are NOT personally liable for past debts but if you take on a new loan, you will likely be personally liable for that new loan;
  • don’t accept a new loan if a term is that the director must provide a Personal Guarantee (you will be putting your house at risk);
  • if a company is insolvent, the lead strategy is to first stop paying old debts and instead move to minimising the risk of personal liability – a liquidation does that!

There is a wealth of information on liquidation on this website.  Why not start with a look at Our Liquidation Service.

WHY NOT CALL US

At Dissolve, we provide a free Advisory Hotline. We provide advice and a range of debt solutions to companies, directors, public accountants, lawyers, creditors and individuals. Dissolve may continue to provide advice or may refer you to one of the other specialist business units in the Insolvency Solutions Group to provide the best fit debt solutions.

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Reach out for a free 30 min consultation

Liquidation Law can be a complex area and circumstances vary, so we recommend a telephone call for your initial consultation. We will then gladly meet you or just confirm our advice and quote in writing.

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