What happens to my company when I’m made bankrupt?
This is an interesting question that many people fear to ask but one that we get asked a lot. Most businesses in NZ are run by owner/operators. They are both the directors and shareholders of the business. When they start the business, they usually don’t have and working capital and must borrow from friends, family, other business associates or, most commonly, their bank. Any sensible lender will want security over the directors personal assets, usually their home, and any trade creditors will usually want a personal guarantee before they supply on credit.
And there is the problem in a nutshell. The moment the business begins to fail, the creditors start to look towards the owner/operator to make good the company debt. The owner remains personally liable for a significant proportion of the company’s debt as a result of the guarantees given and faces bankruptcy. Gone is the safety of operating through a limited liability company.
They have no choice but to liquidate the company. They will sometimes lose their home and, often, must apply to be declared personally bankrupt if they cannot negotiate a successful compromise with their creditors.
It is therefore imperative that any owner/operator seek professional advice when their business starts to struggle and not after it has completely failed. Early intervention to restructure the business may save it and, if that is not possible, an early exit may save the creditors of the company significant losses but also save the owner from personal bankruptcy.