The position of Directors in a Failed Company: Between a Rock and a Hard Place

Liability of Directors of a Failed Company

Rock and Hard Place

Limited Liability Companies have been existence for well over 100 years. They arose out of the need to give limited liability to persons whom were interested in investing in a business, but whom did not wish to be exposed to unlimited liability of being a partner in the business.

Generally, the limited liability afforded to shareholders also applies to the directors of the company, but there are exceptions. Whilst most of the exceptions arise when a company is insolvent, directors also have liabilities when the law imposes parallel obligations upon directors to ensure compliance by the company of its obligations, for example Occupational and Health Safety Obligations. Directors also have fiduciary obligations to the company to act in the company’s best interest.

A company is insolvent, when the company is not able to pay its debts when they become due.

  • A company will be insolvent even where its assets greatly exceed its liabilities, if it is not able to utilise those assets to meet its current obligations.
  • A company is solvent, even if its liabilities exceed its assets, provided that it is able to meet its current obligations, and there is no expectation that it will cease trading.

When a company fails because of insolvency, a liquidator is appointed to it so that the failed company may be wound up. Generally in any winding up there are a number different persons and groups that have d competing and different interest. They are:

The Liquidator, who is appointed by the court, or whose appointment is confirmed by the creditors of the company to wind up the affairs of the company.

The Secured Creditor who may hold fixed and floating charges over the assets and undertaking of the failed company, and often collateral mortgages over the directors home.

The Employees who were employed by failed company and who may be owed wages and other entitlements.

The Ordinary Unsecured Creditors who have supplied goods and services to the failed company, and who are owed money.

The Australian Taxation Office who is often the failed company’s largest creditor. It is also represents claims of employees for unpaid superannuation contribution.

Workcover for unpaid Worker Compensation Insurance Payments.

Debtors of the Company, companies who owe the failed company debts for work and services provided by the failed company to them.

GEERS the government organisation who will meet and advance unpaid employee wages and entitlements where the failed company is unable to meet those obligations.

The Receiver, who may be appointed by the Secured Creditor to take possession of the assets and undertaking of the failed company. The Receiver has a similar role to the Liquidator, has a higher claim to the failed company’s assets and is only interested in recovering money and assets for the secured creditor.

The Director, of the failed company who everyone else blames.

DIRECTORS LIABILITIES

A Directors Liability Mud Map

INSOLVENT TRADING CLAIMS AGAINST THE DIRECTOR
The appointment of a liquidator to the failed company, automatically gives rise to some claims by the liquidator against the Director, if the director allowed the company to incur a debt, when the company is insolvent and the director had reasonable grounds for so suspecting. The liquidator is able to bring proceedings against the director and recover as damages the amount of each debt that was incurred whilst the company was insolvent that had not been paid when the company was wound up.

DIRECTOR LIABILITES OWED TO THE AUSTRALIAN TAXATION OFFICE

As of 29 June 2012, a director of the Company is liable to pay the Australian Taxation Office, any liability owed by the failed company to the Taxation office:

  • that is older than 3 months and which has not been reported
  • any liability subject to a Director Penalty Notice that has not been complied with

A director is also liable to indemnify the Australian Taxation Office against any unfair preference claim made against it by the liquidator in respect to any payment made by the company to the office in the 6 months preceding the winding up.

These liabilities really place a director in a very difficult position upon realising that his company may be failing. It is in most case already too late for him to avoid liability.

LIABILITY FOR UNPAID WORKER COMPENSATION PREMIUMS
In 2008 amendments were made to the Workcover Legislation that imposes liability on directors for any unpaid Worker Compensation Premiums owed by the failed company. Those amendments until recently were not well known, but are now very hard to escape.

LIABILITY UNDER GUARANTEES
It is unnecessary to say, that any liability under guarantees given to creditors on behalf of failed company, immediately arise on winding up, if they have not arisen at an earlier time. A liquidator is also able to commence proceedings against a director under a guarantee given to a creditor, where prior to the winding up, that creditor received a preference payment from the failed company.

 

JDC updated 24 Feb 2014

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