One of the main concerns of a director whose company is experiencing financial difficulties is to understand the potential consequences if their company enters liquidation. Well, if it is any comfort for those worried directors, they’ll probably find the consequences are usually not as bad as they fear. But there are some things to be concerned about.
You are not alone
Firstly, being a director of a company that enters liquidation is a very common thing. Since the global financial crisis, corporate insolvency numbers have run at about 10,000 a year. That’s a lot of insolvencies, a lot of worried directors and, as it turns out, a lot of breaches of the Corporations Act.
Liquidators are required to report to ASIC if they suspect any offences, or if creditors will get less than 50 cents in the dollar. So that’s most of the time. In about 70% of matters, the liquidator reports possible offences to ASIC.
What are the common offences?
The most common offences reported are insolvent trading, failure to keep adequate books and records and general breaches of a director’s duty of care to the company or other stakeholders.
What will ASIC do?
There are many actions ASIC could take against directors. ASIC has helpfully published a report called “ASIC Enforcement Outcomes July to December 2013”. In that six month period, there were:
- 7 criminal prosecutions of directors;
- 176 follow-up actions to make directors cooperate with a liquidator;
- 32 Director Disqualifications; and
- 4 actions against liquidators.
That’s a total of 219 actions in the world of corporate insolvency. Not many considering there were around 3500 potential actions.
Directors often think there is an automatic director banning if one of their companies enters liquidation. It is not so. But you’ll see from the prosecutions above that director disqualifications is one of the areas where ASIC is active. ASIC is able to disqualify a person from managing a corporation for up to five years if the person has been an officer of two or more companies that have entered liquidation within the previous seven years. Before doing so, ASIC will consider a few things:
- Whether the liquidators of the companies reported any possible offences;
- Whether the companies were related to each other; and
- Whether disqualification would be in the public interest.
As there were only 32 prosecutions in the six month period, it’s clear that ASIC just doesn’t have the resources to disqualify every director that could be disqualified.
What will the liquidator do?
This is much harder to predict. Whereas ASIC looks for “blood”, being offences, a liquidator looks for “money”. That is, a liquidator will usually only take an action against a director if there is likely to be a monetary return. There are no statistics to help us see how common that is. Most commonly that would be an insolvent trading action.
Effect on credit rating
Credit reporting agencies do keep track of companies that enter liquidation and the names of the directors of those companies. But to get that information they have to specifically tick the relevant box, and pay for it. So that “mark” on a credit record is there, but it is unlikely to be noticed if you are applying for credit in a personal capacity. For example, if you are applying for a credit card or a personal loan from a Bank then it is unlikely to be noticed or become an issue. If, however, you are going for a business loan then it is much more likely to come to light.
So overall, if you are a director of a company facing liquidation, there are some things to worry about, but it is probably not as bad as you fear.
Cliff Sanderson is a company liquidation and corporate restructuring specialist with over 26 years experience in Australia and Asia. He is the founder and chief executive of liquidation firm Dissolve.