Liquidation vs bankruptcy: what’s the difference for directors?

Liquidation deals with a company’s debts and is run by a registered liquidator. Bankruptcy deals with a person’s own debts, is run by a trustee in bankruptcy and usually lasts 3 years and 1 day. A company going into liquidation doesn’t make its directors bankrupt. However, personal liabilities such as guarantees and director penalties don’t disappear when the company is wound up.

Liquidation vs bankruptcy at a glance

When are you personally liable for a company’s debts?

When you run a business through a company, the company owns the business assets and owes the business debts. Directors and shareholders generally aren’t liable for the company’s trading debts. However, you can become personally liable through:

• Personal guarantees: banks, landlords and suppliers often ask directors to guarantee the company’s debts.
• Director penalties: if the company doesn’t pay or report PAYG withholding, GST or superannuation guarantee charge on time, the ATO can make directors personally liable for an equal amount. See our director penalty notice guide.
• Insolvent trading: if the company keeps trading and incurs debts while insolvent, a liquidator may later claim those debts from the directors, whether or not they gave a guarantee.

If you trade as a sole trader or in a partnership rather than through a company, you are personally liable for the business’s debts.

What happens to directors when a company is liquidated?

The liquidator takes control and the directors’ powers end. However, directors must help the liquidator and provide information about the company’s business, property, affairs and finances. The liquidator investigates what happened, including whether there was insolvent trading, breaches of directors’ duties or transactions that can be recovered.

If you are not bankrupt, the liquidation deals only with the company’s liabilities to its creditors. It doesn’t deal with your personal debts or guarantees, which you still owe. Any money you owe the company, such as a director’s loan, also still has to be repaid.

What happens to the company if a director goes bankrupt?

An undischarged bankrupt is automatically disqualified from managing a corporation, so you can’t continue as a director. Your shares in the company vest in your trustee in bankruptcy, who decides what to do with them. Depending on the circumstances, the trustee may sell the shares or take steps to have the company wound up to pay your creditors.

The main consequences of bankruptcy

• It usually lasts 3 years and 1 day.
• Your name is recorded permanently on the National Personal Insolvency Index.
• You need your trustee’s written permission to travel overseas.
• You can’t manage a company while you are bankrupt.
• It can affect your ability to get credit and to work in some occupations.

See our bankruptcy guide for more detail.

Alternatives to bankruptcy

Other formal options for individuals are temporary debt protection (21 days in which unsecured creditors can’t take enforcement action), a debt agreement and a personal insolvency agreement. Which one suits you depends on your income, assets and debts.

Who should you talk to?

For your company’s financial problems, speak with a registered liquidator. For your personal position, speak with a registered trustee in bankruptcy, or with an accountant or lawyer you trust. Be wary of unregistered advisers who promise to “make debts disappear”.

At Greengate Advisory, our registered liquidators advise on the company side, including liquidation, restructuring and personal exposure through guarantees and director penalty notices, and can talk you through your personal options. The first consultation is free and confidential.

Common questions

Does liquidation make the director bankrupt?

Not automatically. A director only becomes bankrupt if they can’t pay personal debts, such as guarantees or director penalties, and either applies for bankruptcy or a creditor obtains a court order.

How long does bankruptcy last in Australia?

Usually 3 years and 1 day. It can be extended if the trustee objects to it ending.

Can I be a company director after bankruptcy?

Not while you are bankrupt. Once the bankruptcy ends, you can generally be a director again.

Is my personal guarantee still valid after the company is liquidated?

Yes. Liquidating the company doesn’t release your personal guarantee, and the creditor can still pursue you.

Can a company go bankrupt?

No. Bankruptcy is for individuals. An insolvent company is wound up through liquidation.

Is the first consultation free?

Yes. The first consultation is free and confidential.

This page is general information, not advice about your situation. Sources: AFSA What is bankruptcy? and Consequences of bankruptcy; ASIC Bankruptcy and personal insolvency agreements; the joint AFSA, ASIC and ARITA guidance on personal bankruptcy and company liquidation.