The purpose of a limited liability company is to protect your personal assets when things may go bad with a company where you are the director. The legal purpose of limited liability is to limit the liability to the value of your shareholding. All company liability will stay with the company and will be the company’s liability as it falls due.
It is often brought to my attention that individuals are providing their companies with personal funds to pay off old debts thus becoming an unsecured creditor. This does not change the solvency of the company, nor does it provide any financial benefit to the business or its shareholders. What individuals should be aware of is that if they loan funds to their company, they should do so by way of registering a security.
The whole point of a company structure is to protect its shareholders by limiting liability to the limit of their unpaid shareholdings. The last thing I like to hear is that a director has been advised to either draw down on their mortgage or obtain a personal loan to remit payments to company creditors where they are not personally liable for the debt.
Instead, the director should revisit the company’s capacity to pay and determine whether the company is solvent and should continue to trade or whether it needs the services of a restructuring specialist to bring everything back in order and minimise the director’s personal exposure.
There are different options available and this is where they should seek professional advice.
The Corporations Act is not designed to punish directors. The aim of the legislative provisions is to provide
- an orderly and fair procedure to handle the affairs of insolvent companies.
- to ensure a pari passu equal distribution of the assets amongst creditors.
- to ensure claims against the insolvent company are resolved with the minimum of delay and expense.
- to rehabilitate financially distressed companies and businesses where viable.
- to engage with key stakeholders in the resolution of insolvency issues.
- providing a safe way for directors to trade out of financial difficulties to ensure the survival of the Company’s business.
- introducing a ‘safe harbour’ for directors from personal liability for insolvent trading if they appoint a restructuring adviser to develop a turnaround plan for the company.
There are many options for a Company when the directors consider that it is suffering from financial stress, including Small Business Restructuring, which is designed for small businesses without the financial burden of a Voluntary Administration.
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