Directors of previously wound-up businesses are getting caught out through personal guarantees

Directors of previously wound-up companies are still in the firing line if they gave personal guarantees as business-related insolvencies increase.

Business-related personal insolvencies are on the rise, as personal guarantees catch up with directors of previously wound-up businesses.

According to the Personal Insolvencies Quarterly Report from the Australian Financial Security Authority for the December 2023 quarter, business-related personal insolvencies accounted for 27.3 per cent, or 731, of all new personal insolvencies.

That was an increase from 558 in the corresponding December quarter in 2022 and there is no sign of an abatement with the January 2024 update finding 222 people who entered into a formal personal insolvency were also involved in a business.

Insolvency and business turnaround specialist Jirsch Sutherland partner Malcolm Howell said while personal insolvency numbers were still not at pre-Covid levels, they’re likely to continue trending up.

“Generally, there’s a lag of six to 18 months from the time a corporate insolvency occurs to when a business-related personal insolvency happens,” he said.

“We’re now hitting that post-Covid lag time frame, as creditors call in their markers – that is, personal guarantees.

“Directors are often required to sign personal guarantees, which renders them personally liable for any debts that the company cannot pay. And we’re now seeing greater pressure being applied by second-tier financial institutions, while the ATO continues to issue a lot of Director Penalty Notices.

“The result will be even higher levels of bankruptcies.”

Business-related personal insolvencies are increasing.

Mr Howell said it was important for directors to understand their obligations under a personal guarantee – especially how long those obligations apply.

“Many directors are shocked to discover they are liable for a company’s debts owed under an agreement, even if it’s years after the original agreement was signed, the company has been wound up, or they haven’t been involved with the company for a very long time,” he said.

According to AFSA figures there were 2608 personal insolvencies in the December quarter, an increase of 12.4 per cent on the corresponding quarter in 2022,

There were 1527 were bankruptcies (an increase of 13.6 per cent), 1042 were debt agreements (up 11.2 per cent, 37 were personal insolvency agreements (a rise of 32.1 per cent) and two were insolvent deceased estates.

NSW recorded to most personal insolvencies at 759, followed by Queensland 662, Victoria 494, WA 217 and South Australia 143.

Mr Howell said one trend he has noticed is an increase in the number of Personal Insolvency Agreements (also known as Part X Agreements), which are an alternative to bankruptcy. During the December quarter, PIAs rose by 32.1 per cent compared to the corresponding period.

“The numbers are still low but I anticipate more individuals will take advantage of these agreements,” he said.

“The main benefit is that creditors are unable to initiate further action to recover their debts, and this can prevent you from being forced into bankruptcy.

“It’s a tailor-made formal agreement with the individual’s creditors that’s structured specifically to suit the circumstances at that time. That could include a lump-sum payment, payment over time, and/or disposal of some or all assets.”