The personal liability virus: Beware, get tested and stay safe.

At the start of the COVID-19 pandemic, the State and Federal Governments introduced a number of excellent measures to assist businesses from collapsing. These included monetary assistance such as JobKeeper, cashflow boost, the introduction of a moratorium on director insolvent trading, higher thresholds for responding to demands from creditors and enacting the National Code of Conduct for commercial tenancies, to name a few. These measures provided directors with breathing room that allowed them to weather the storm without the need to rush and place their business into external administration during the height of the pandemic.

These measures have since expired or been wound back. For those business that have not adapted to the current environment and have been reliant on these measures, the directors of these companies must consider if it is necessary to appoint external administrators if the business is insolvent or is likely to be insolvent. Directors should not only consider the financial position of the business, but also the impact it may have on their personal financial circumstances, especially under the following circumstances:

Personal guarantees

If a director has personally guaranteed business debts, delaying a decision to appoint an external administrator may increase their personal exposure. Even if the company was able to negotiate a debt deferral during the pandemic, the debt remains and may have continued to increase due to the accrual of interest, fees and other charges. If this is an issue for you, it would be prudent to review all personal guarantees you have executed and seek advice on the next course of action.

Security against personal property

As with personal guarantees, a director may have had to mortgage their house to obtain a bank loan, overdraft or bank guarantee for the bond on a commercial lease. In circumstances where a director delays the appointment of an external administrator and the business has not been able to meet the ongoing rental payments, the landlord can call upon the bond to cover the unpaid rent.

Another example is where a director secures a business loan from a financier to fund the business. Again, the loan may have been secured against personal assets and in which case, if the business has not been able to service the loan and continues to accrue interest and charges, it would increase the amount the director would have to repay personally to the financier.

You should seek advice if either of these scenarios is an area of concern.

Director penalty notices

The Australian Taxation Office has not been actively pursuing outstanding tax debts since the pandemic started. However, it now appears that the tide is changing and the ATO is starting to ramp up its collection activities. It is essential that directors make it a priority to lodge Company returns on time or risk being personally liable for tax debts such as PAYG withholding, Superannuation Guarantee Charges and GST under a “lockdown” Director Penalty Notice. If this is of concern, it is essential that you seek urgent advice.

Insolvent trading

The moratorium on insolvent trading expired on 31 December 2020. If directors are continuing to trade, they have to consider whether the company is insolvent or is likely to be insolvent prior to incurring any further liabilities as a claim may be brought against them should the company be wound up. Directors need to be mindful of monitoring the business activities and its performance to avoid this situation.

We are here to help

If you are a director of a company and have concerns regarding the ongoing viability of your business, please contact the Business Recovery and Insolvency Team at PKF. We can provide expert help with the available options to stay safe from the debt virus from the pandemic.