Running your own business is often high risk, high return. You never quite know how it is going to pan out. However, even when your business is going well as a director you may find yourself in financial difficulty & think it would have no effect on business. But it actually has some of the biggest impacts that could bring your business down for good.

We rely on directors to provide sound advice to turn around a company’s fortunes but they themselves may be vulnerable to their own personal finances. After all if managing finances were that easy we would all be wealthy.

Directors’ personal insolvency can lead to overall downturn for a company because stakeholders rely on director’s actions to carry on organisation’s investment decision. The question here arises is “how are directors expected to manage shareholder’s money when they cannot manage their personal debts”? Such an impression brings down the monetary value of the organisation. This may also leads to disqualification of director in case the director decides to declare bankruptcy.

As witnessed in the past it is often very hard for a director to make a comeback after a discharge from personal bankruptcy as people are reluctant to rely on their decisions.

If a director declares bankruptcy, they are subject to the following restrictions according to AFSA.

  • You cannot be a director of a company
  • You will be prohibited from managing a company
  • Some professional/licensing bodies may restrict or prevent you from that trade or profession
  • You may not be able to hold public positions
  • If you are in a business and trade under a business name different to your own, you must tell everyone you deal with that you are bankrupt.

It is clear if you as a director or manager of a company are to declare bankruptcy then you are almost at the brink of your professional career. Given that directors are in position of high responsibility, high power, and ultimately high return, they should be able to figure out their personal finances so that they don’t end up with significant debt they cannot repay.

Is the Australian bankruptcy system too harsh on directors who find themselves declaring bankruptcy? No, I don’t think so.

Of course unexpected things may happen and the director may find themselves bankrupt for reasons outside their control but they should have a foresight to see that they are treading on thin ice with their personal finances. Multiple bankruptcies over time by the same person must be reviewed for criminal intent to ensure the financial system is not abused.

Before thinking of declaring bankruptcy it is essential that the director explores all possible options to manage their debt situation. Informal arrangements with the creditors, a debt agreement under the Part IX of the Bankruptcy Act, refinance of existing debt, payment moratorium or even just speaking to a debt management company to get their insight would be beneficial to the director.

Directors and debt is a complicated issue but there is always help round the corner and bankruptcy must be seen as the last resort given the implication of being bankrupt whilst being a director.

 

Rasad Merchant CPA
Strategy and Business Development Manager & Secretary of the Personal Insolvency Professionals Association (PIPA)

Rasad brings over 8 years’ experience working in the insolvency sector to Debt Cutter, where he is dedicated to achieving peak business performance. With a background as both a trusted business advisor, and as a business owner, Rasad uses his foresight to strategically manage business growth and opportunities.