Personal Exposure in a Small Business Restructure

Tadhg Schultz, Marketing and Brand Coordinator

As anyone keeping up with the news will know, insolvencies over the past two quarters have repeatedly reached record highs across various industries. Whilst this trend is likely to persist in the near future, we at Hamilton Murphy Advisory have found a silver lining in the growing number of clients opting to engage our services with respect to the Small Business Restructuring (“SBR”).

We’ve covered SBR’s extensively in the past, so if you’d like to know more about the criteria for your client and how the process works, please visit the dedicated page on our website. The question we are often asked and wanted to discuss in this article is “does an SBR protect my client from personal exposure?” As near an SBR requires creditors to compromise their debts for return of less than 100 cents/dollar.

What if My Client Has Received a Director Penalty Notice? (“DPN”)

If there’s one clear trend to take away from the past year it’s the ATO’s growing willingness to issue DPNs to clients with tax non-compliance. When it comes to DPNs, the risk of personal exposure largely depends on whether your client has received a non-lockdown or lockdown DPN. If you’re unsure of the distinction between these two types, we recommend reading our in-depth article on DPNs for more details. in depth article on DPNs for more information.

In the event that your client has received a non-lockdown DPN, it’s important to take action quickly so they can avoid personal liability. By starting a SBR within the twenty-one (21) day time frame after received a DPN, a company director can avoid being held personally liable for the amounts demanded under the DPN. Once the SBR is successfully completed, the ATO must compromise on any remaining portion of the debt following the dividend paid to creditors.

If your client has received a lockdown DPN, or a DPN with a lockdown and non-lockdown portion, the Director will be made personally liable for the full amount of any lockdown portion. In this instance, if any SBR or other insolvency appointment is initiated, the ATO may seek to recover either the full quantum of their debt or the balance following a dividend of less than 100 cents/dollar.

What if My Client Has a Personal Guarantee?

It’s common practice for directors to provide personal guarantee when financing assets. Financiers will also typically register a security over the asset on the Personal Property Securities Register (“PPSR”). In our experience, as long as these finance agreements are managed in the ordinary course of business, financiers rarely rely on the personal guarantee to meeting the Company’s obligations. Issues generally arise when there are significant arrears on an account prior to the appointment of a restructuring practitioner. In such cases, the financier, as a secured creditor may utilise their security and the personal guarantee from the director(s) to make up any shortfall arising from a compromise under an SBR.

It’s worth noting that during an SBR there is a moratorium on any creditors taking action under a personal guarantee. Once the restructuring period ends, a creditor holding a personal guarantee is free to pursue the director for the full quantum owed by the Company. In such cases, it is important to engage your clients to seek advice and make arrangements for payment with the creditor.

Key Takeaways

SBRs offer a great opportunity for eligible small businesses to swiftly and effectively compromise onerous legacy debts, helping your clients maintaining their relationship with you and position themselves for profitable future trading.

Although an SBR cannot completely eliminate personal liability in the event of lockdown DPN or personal guarantee, there are strategies to mitigate these risks. When prompt action and guidance from one of our insolvency experts, your client will be afforded the best possible chance to recover their position and that of their business.

We’re Here to Help

If you or your client are facing financial distress, it is crucial now more than ever that you seek assistance from one of our insolvency experts. Early intervention is key to giving a Company the best possible chance of recovery and avoiding potential personal liability.

If you have any questions on insolvency or have a client that is currently facing financial difficulty please contact the Hamilton Murphy team by telephoning (03) 8866 7600 or via email to info@hamiltonmurphy.com.au