Directors and business owners, do you know what guarantees you have signed for?
At Green & Associates, we know that many directors and business owners have been hit hard by COVID-19. As we move to the recovery stage of the virus, and many businesses try to get back on their feet, personal liability could be a rude shock awaiting many directors and business owners.
Not only that, but the ATO and ASIC have powers to go after individual directors and prosecute them criminally. We’ve noticed a big upswing in regulators doing exactly this in the last few months, so it is critical that if your business is in any distress during this time that you are mindful of the potential personal liabilities you may have.
While there are many ways personal liability can arise the following 5 areas are some of the most common and problematic.
- Bank Debt
No two ways about it, bank debt will be top of mind for most leveraged businesses.
And when it comes to business loans, directors are generally guarantors. These loans could be for a variety of facilities, such as lines of credit, business loans, car loans or loans over property owned in the business – so there is potentially a large amount of liability awaiting directors who have signed on as guarantors.
It’s crucial that directors take a proper look at all debt and what their options are to renegotiate and/or access new debt options. Go through each piece and get clarity on timing / potential liability so that decisions can be made on what debt to deal with when. This is largely the space of your accountant or financial advisor.
A lot of businesses struggle from BAS period to BAS period to manage their tax, and no one saw what happened in March and April coming fast enough to prepare for it. Whether it is GST, PAYG or past tax debt liability Directors and Offices can incur personal liability if the business fails to meet its obligations. On top of your regular tax liabilities directors can also be personally liable for Innovation grants, luxury car tax (LCT) and wine equalisation tax (WET).
That’s possibly a lot of liability, especially when considering many companies may have had their debts build up during the pandemic. And, the ATO has already started to aggressively go after directors for debts. If the ATO decided to audit you today, are you in a position to deal with it?
While there is some small relief available through the COVID-19 package, this won’t make much of an impact on those with large debts. So: make sure you are clear on your present tax liabilities. Speak to your accountant and lawyer to consider whether you can enter into a payment plan, or negotiate with the ATO in light of a possible deterioration in the future to spread the risk over time. Understand what your options are so you can make the best decisions in the next 6 months to manage your risk.
- Commercial Property and other Leases
With business closures and downturn, many owners have struggled with lease payments for property, vehicles, plants and equipment. This is particularly problematic if a director or owner has signed guarantees for the lease, because doing so makes them personally liable. If you’re in this position, and your landlord or lessor wants to recover rents, you’re simply not shielded from these costs.
In these cases renegotiating commercial rent is a must (and it must be properly documented!). It’s essential that you understand which agreements have guarantees attached to them, and which are secured against other assets. There are potentially many options that directors and business owners can aim for when renegotiating, such as free periods, decreases for set periods or linking rent to turnover.
While negotiating sounds straight forward, the reality is that many on both sides of potential transactions can make it very difficult to come to an agreement. In these cases, it’s imperative that you understand your legal rights and obligations.
- Commercial contracts and debtors
Some of the groups hit hardest during the last month have been franchises in hospitality, retail and gyms. We have been helping many and understand the pressures that you might be under, especially if the franchisor continues to chase you for fees under the Franchise agreement but your business is not even open. On the flip side obviously, Franchisor’s entire business is providing services to Franchisees and they also need to preserve their business for the medium term. Whichever side of the fence you sit on there are significant legal considerations to be aware of which are unique to franchises when negotiating and significant personal liabilities.
Beyond the Franchising industry, there are a myriad of other commercial agreements any type of business could have where there is potential for guarantees to have been in place. Understanding the scope of these agreements in your business is critical. We suggest people in this situation conduct a full review of all commercial agreements, renegotiate where possible/necessary, seek help from a government program or engage in ADR where appropriate.
- Insolvent trading
While previously directors used to face personal liability for debts incurred when there were ‘reasonable grounds’ to suspect insolvency, this is no longer the case in the short term.
Directors received a little breathing space from liability when the Government fast-tracked legislation that effectively gives directors a six-month moratorium against incurring personal liability for insolvent trading. This operates from 25 March 2020 to 25 September 2020. It’s important to note that this moratorium does not apply retrospectively. If you think this provision may apply to you, the best thing to do is contact Green & Associates for a review of your case.
The Government has also passed legislation that increased thresholds for winding up and bankruptcy proceedings, so there are a few options worth exploring should a director find its company is struggling to pay its debts.
There’s a lot to unpack there, but it’s important to know what you’ve signed up for and what challenges could be heading your way post COVID-19.
To get on top of your potential personal liabilities and understand your legal obligations it’s important that you get appropriate legal advice. We are happy to have a 15-minute call for free at first instance to discuss your situation on +1 (02) 8080-7585.