This was the challenging situation facing a husband-and-wife team. The wife was “listed” as the company’s director and the husband as an employee, albeit one who made all company and financial decisions (i.e. a shadow director).
This is a familiar situation, and such structures should be reviewed regularly with your client’s advisors to avoid any nasty surprises. The purpose of this article is to highlight some of the key risks to consider when operating similar structures. We will leave the discussion of the difference between a shadow director and de facto director for a separate article at a later date.
The situation: Liquidators were appointed over the company. At the time of appointment, the wife was the sole director and it is understood that the original intention was to remove her as a director at some point in the future, but for a variety of unknown reasons, this process did not occur.
The Company, a provider of equipment hire to the mining industry, and the wife (as director) had provided several personal guarantees to the financiers. In addition, the Company was hopelessly insolvent for a number of months prior to the commencement of the liquidation and the liquidator had commenced recovery proceedings against the wife in relation to insolvent trading.
The financiers had also commenced recovery proceedings in relation to the personal guarantees which resulted in a default judgement and a very real threat of bankruptcy. Given the financial position, the wife approached SV Partners requesting we act as bankruptcy trustees.
Risks and responsibilities: The wife in this case was largely unaware of the responsibilities she owed to the Company, and the other potential financial recourses against her, including:
- Personal guarantees: she had signed a number of personal guarantees which allowed the financiers to pursue her personally for the shortfall in equity from the equipment sale;
- Superannuation and tax liabilities: the wife could have been held personally liable for unpaid superannuation and PAYG (pursuant to the director penalty regime); and
- Statutory duties: as outlined in the Corporations Act, all directors must act in good faith and in the best interest of the Company (including a duty to prevent insolvent trading).
Outcome: By applying some good bankruptcy smarts and working co-operatively with all stakeholders, we managed to negotiate a commercial settlement and avoid the wife from entering bankruptcy. Needless to say, she was very happy with the outcome, and subsequently on speaking terms again with her spouse.
Whilst this was an informal agreement between the stakeholders, the other two types of formal personal insolvency arrangements available to individuals without the need to declare bankruptcy are:
As mentioned, this is not an uncommon situation. Whilst there is merit in having your spouse as a director, it is a good idea to review this position with your advisor when required and proactively stay across matters in the business to ensure critical errors are not made.
There are several options available to individuals in tough financial situations apart from bankruptcy. All options should be fully discussed and explored with a qualified practitioner prior to entering bankruptcy.
As always, prevention is better than cure and being proactive often means that more options are available.