Are my personal assets exposed if my company goes into liquidation?

Directors need this advice.

Given the economic climate we have endured over the past few years, it is clear that many businesses are in a tough spot. Many are burdened with onerous, and sometimes crippling levels of debt. In such circumstances, it is understandable that business owners might consider restructuring options. If you’re interested in hearing more on restructuring options, check out our upcoming seminar series “Reviving Through Restructuring – Options for Insolvent Businesses”.

Further to this, and according to recent ABS data, only about 52% of new businesses manage to survive beyond their first four years¹.  This survival rate tends to dip even lower for smaller businesses. Given the low survival numbers, the question is what entrepreneurs should consider before embarking on a business venture, and what should they continually assess and reflect upon throughout the business journey. Asset exposure planning is essential to reduce the downside risk and potential personal asset exposure if the business venture does not succeed, or a restructuring is not a viable proposition to save a business.

We have created a Guide to Asset Exposure and Personal Liability in Business to help business owners and entrepreneurs assess their risks and exposures. It is an incredibly helpful resource which canvasses the asset exposures we commonly see from Worrells, coming from 50 plus years of experience in providing insolvency services. Additionally, it seems the main reason asset exposure advice is generally not acted on comes down to cost. The simple fact is: asset exposure and structuring advice, and its implementation, comes at a cost.  

When assessing asset exposure and implementing asset exposure strategies, it is important to remember that:

• The Bankruptcy Act 1966 has evolved over the years, so there is no perfect asset exposure structure. It is a matter of balancing priorities and determining what is most important.

• Asset exposure planning evolves and therefore needs constant review.

• Asset structuring is far more effective if planned well in advance.

• Financial problems must be addressed proactively, and proceed on the basis that anything that has been done, in hindsight, can be undone.

• A complete asset exposure strategy must consider not only business risk (and holding appropriate insurance cover to mitigate those risks), but also Family Law, Business Succession Planning, and Estate Planning)

Our Asset Exposure Checklist also provides guidance on the risks faced by those in business. While not exhaustive, and without considering specific circumstances unique to each individual or the need to obtain professional advice, it helps identify:

• Some key risks and exposures faced by those involved in a business enterprise.

• Whether your clients are exposed and the areas that may need to be managed  

It is also worth noting that with the many areas of potential exposure that directors face, some of them are very serious and may have a significant adverse effect. Advisors can give their clients the following tips to assist them make informed decisions:

• Know and understand how their business structure works—have a strong discipline about how the structure is administered.

• Read and understand all contractual documentation carefully, such as terms of loans, lease and supply agreements etc.—and negotiate before agreeing to them.

• Limit any personal guarantees—keep a register and put a maximum limit on any guarantee given.

• Never own assets personally.

• Ensure any asset transfers are for full market value and proper consideration is paid (not just via journal entries).

• Ensure the at-risk person does not make any direct financial contributions to assets or servicing of debt—the non-at-risk-person holding assets needs their own income to service the debt.

With insolvencies on the rise, directors understanding the risk of asset exposure should form an integral part of their planning, and should be revisited consistently to ensure the plan is still appropriate.

¹ Almost half of new businesses failing within their first four years - Inside Small Business