Company bankruptcy - How far can it go?

One of my friend has been running a business for last six years and running into financial trouble now.

She is the director of the company running the business. She borrowed money against her house as well as from friends to survive the business but no luck.
She got business credit cards debts and also business loans.

I'm wondering what will happen if you decalars bankruptcy ?
Q1. Does it stop at the business or does it go to her as well because she is the director?
Q2. What will happen if she sells her home and pay off her personal (friends) loans before declaring bankcrapy?
Q3. Would it let her break her office lease and also software agreements?

 

Companies cant be found bankrupt. Instead they are considered insolvent (a term for incapable of being able to pay some or all the debts) and complex provisions in the Corporations Act allow for either an administrator or a liquidator to be appointed. They manage the company during that period of administration.

In addition the person may be found bankrupt. The company and person may be associated but the acts are separate for each. Some company debts may even be enforceable on the Director eg unpaid PAYG, unpaid super and trading while insolvent + others

A company Director cannot be a bankrupt in that role. Legal or Insolvency practitioner advice should be obtained. Typically a bankrupt cannot "manage" a company. That is a formal and informal concept. So they cant appoint a shadow Director in their place for example.

The liquidation triggers termination of many contracts. Its a issue for a liquidator to advise on. liquidators are officers of the Court. Separate legal advice can be obtained but isnt always needed.

 

As Paul says bankruptcy act only applies to individuals corporations act applies to companies.


a) Company in first instance. But directors can be personally liable in a number of ways such as for insolvent trading. If she has used her house as security for the loan the house can be taken possession of and sold. If she has personally guaranteed the loan then she can be further liable.

b) They could be forced to give back this money as it is an unfair preference. Depends on the situation though as she may have borrowed the money rather than the company

c) Possibly the lease could be disclaimed.

Both she and the company should get legal advice asap.

 

Need to separate the business debts from the personal ones, although often business debts have personal guarantees attached so they become both

As an example, if the business were to be wound up and there was no personal guarantee on the lease then yes the obligation would stop there, same with any debts purely in company name and not with any personal or director guarantees


The personal debts are more directly affected by a personal bankruptcy but that doesn't fix the company debts

If she's trying to do the right thing speak to a reputable insolvency firm for advice etc, just be careful of the dodgy pre insolvency advisors or those who allegedly enjoy being a bit loose with the truth and figures like Philip whiteman in Melbourne or ken Thomas in perth as although they largely got away with such behaviour in past there's currently a significant shift towards curbing such behaviour by authorities

 

Also, while I always stress the importance of quality legal advice in times of uncertainty, this included, this area is one where I do think a specialist insolvency type firm will give a better result as the main advisor Vs a lawyer as they play not only be more affordable but also generally take a more commercial approach. I do recommend doing that in hand with legal advice from a feedback and general understanding poijt of view though

 

Important thing to take into account is that once the director of a business suspects it may be insolvent, or is considered to definitely have been given all the warning signs of insolvency, they can not only be held personally liable for some actions from that period going forward but also must take a different approach to the business in terms of paying more attention/giving more priority to creditors Vs the usual shareholders of the business

I'm paraphrasing for brevity but there's lots of info available regarding this

From a practical point of view, unfortunatepy many get away with it without prosecution or without the civil action to correct inappropriate behaviour of company directors etc, a big factor is the size of debt of main creditors, likelihood of recovery and the type of creditors, eg a bank or secured lender is not going to be as easy to get upset but do nothing as the small local supplier /unsevured creditor owed 2 months worth of invoices etc

 

Get her to either a lawyer who deals in this sort of thing or a liquidator who provides pre-insolvency advice. Never underestimate the ability of a letter from a liquidator saying Dear Creditor, we can offer you x cents in the dollar now to settle this debt, alternatively we can put the company in liquidation and you can bankrupt the client and get 0c in the dollar. Jarvis
Lawyer - David Sorban at DSS Law
Liquidator - Jarvis Archer at Pearce & Heers

 

I think you mean company. a business is not a legal entity but what a legal entity may do.

 

Yup, used the term to refer to the company the business referenced by op was discussing, who knows how many companies this person is director or shareholder of but agreed it was technixally imprecise

 

Thanks guys. I have spent some time with her and her financials.

Practically all loans personal guarantees attached or home is used as security.


Her home can be sold for 1375K. After discussing many options, the house is going to go on sale soon. She has already moved in with her parents with her kids.
Shortfall would be 363K (1738-1375).

She has already started negaciations on selling the business.
Rent and interests on loans is what making her paralised. She basically way over capitalised the business hoping it would work out. Her client base can work well for another company which already has the 'fixed' costs. Hopefully the succusfull sale would clean the shortfall.

If that doesn't happen, I'm planning to pay that off. My hit would be about 18K at 5% IR which I can deal with it. My biggest worry is the mental health of that family.

 

If she sells her house and pays out most of the debt, even with the shortfall of $363k, can the business not just continue?

Is the business itself profitable, other than she was getting caught up with all the interest payments etc?

It seems like she would need to pay out the business loans and home loan as part of selling the house, which would leave her with $342k to payout out some of the other creditors. It would probably be advisable to pay out the credit cards & may be car lease(high interest), staff arrears, ATO debts, and return some funds to family and friends (to keep them onside).

This would then allow the business to continue trading from the office space, and fund further repayments to friends and family who have loaned money.

Doesn't sound too dire once the house is gone, so long as the business itself is actually viable.

 

Yes. That's the plan.
1. Sell the house. Pay off all possible debts.
2. Sell the business. She has lost her confidence. Her family doesn't want her to continue the business either. My suggestion was to run the business until she sells it. P&L will be in good shape after removing all interst payments.

Interesting dealing with the Real estate agents. I'm not that familier with selling.
Agent initially agreed for 1350K reserved priced and all calculations were based on that. Now that it is close to listing, he wants to reduce the price range to 1.2 - 1.3 Mil. I'm sure he is conditioning here. His argument is that it would bring more buyers at the door. She doesn't want to reduce the price range given the reserve is 1.35 mil. But at the same time worried about going agaist the agent's advice.
My thinking is that we should do the right thing. Median for this area is 1.4 mil. RP data says 1.4mil for this house. Then she should stick with 1.3-1.4 mil range for advertising. Why bother bringing in lower people and have higher unrealistic hope?

 

1. See a lawyer and get advice on insolvency and personal bankruptcy and alternatives or
2. See 1. above.

Dont attempt to sell a thing without obtaining that advice. Proceeds can be clawed back later and may affect ability to make arrangements to creditors

 

She is not considering insolvency anymore.

 

This is something she may not control.

 

I would. She needs legal advice ASAP. Unlikely the business can be sold ethically or legally.

 

I had a client sell dev properties and no sooner he had sale contracts the ATO (creditor of his businesses) issued orders over proceeds. He didnt see it coming.

The nasty ones are those who arrive to work and find the bank balance is $0.00. They call bank who explains the ATO issued orders and took it all.

Debt deadlines are often a surprise

 

As we speak, I'm helping her to pay off all debts which can block her business sale.
She got a 'interest freez' period for her bank loans for 3 months. House is already on sale. This will wipeout all her loans.
She has negociated with ATO regarding the payments as well.
The only debt left is from 'Friends & family'. She would be able to pay large part of it when the business sale go through.
Am I missing something?

 

Probably a lot

 

Such as?