Company directors are constantly exposed to risk and can be held personally liable for company debts in a number of ways. This can include under personal guarantees or by a Director’s Penalty Notice (DPN) issued by the Australian Tax Office (ATO). Then there is the risk of business failure, and what this might mean for the director. In liquidation the director can also become personally liable for any amount they owe the company, such as under a Division 7A loan and for potential insolvent trading claims.
Does company liquidation affect my credit record? When a company goes into liquidation the director’s credit record is noted. If personally guaranteed creditors remain unpaid the director’s record could also be filled with defaults. A default will stay on a credit record for seven years. Seven years! Under the positive reporting credit system now used in Australia, a person’s credit score is taking on greater significance. A poor credit record often means you cannot get credit at all. A low credit score means that if you can get credit you will probably pay more for it than you should. Having an adverse notation on a director’s credit report will also cause problems for any new company that they are also a director of when a creditor runs as check on them as guarantor for the new company. This is why, in business, you need a significant other. A sign-if-i-cant other.
Should both husband and wife be company directors? All too often we see family businesses where both the husband and wife are directors of the company. There may be a desire to keep things fair or even between the parties. Further, in the old days, companies needed two directors. This is no longer the case. Having both husband and wife as directors usually means that both need to sign personal guarantees, and both could be liable under DPNs. The end result is that both credit records could be impacted. There is nobody to sign for that new personal loan, or get the store credit, or sign a lease for a rental property. The impact can be wide ranging, very long term and more severe than you might think. Imagine the trouble you could have trying to rent a property when both parties have black marks on their credit record? Rather than co-directorships, issues about ownership and control could be better resolved through shareholdings as shareholders are not exposed to the risks that directors are. In today’s world it is preferable to have one party exposed to risk with the other maintaining a pristine credit record – the significant other.
Who should own the personal assets? The other major issue to consider is the ownership of family and personal assets. Given the risks that directors face, personal assets can also be in jeopardy. Should the director be made bankrupt, with some exceptions, equity they own in personal assets becomes property of the bankrupt estate. So, for example, if the director jointly owns a family home with their spouse, that property will be at risk from a claim by the trustee for the bankrupt’s share. Of course, if both owners are also directors that are forced into bankruptcy the situation is just that much worse. As well as directorships the issue of asset ownership also needs to be considered. Ideally, family assets should be owned by the party that is not exposed to the risks a director can face. Assets, such as the family home, can be protected by selling the equity the director owns to a spouse or other third party. Trustees in bankruptcy will only be interested in assets that have equity attributable to the bankrupt. So, equity can be sold for a fair price and paid for over a period of time, if necessary. Selling the equity to your sign-if-i-cant other is an effective way to protect the family home. This can be a complex area, and our Strategist team are more than happy to answer any questions about this. In business you cannot eliminate risks entirely. You can manage them though. Having only one party exposed to risk, with another able to enter into new agreements, can be a significant risk management tool.