Business-related personal insolvencies are on the rise, as personal guarantees catch up to directors of previously wound-up businesses.
And while personal insolvency numbers are still not at pre-COVID levels, they’re likely to continue trending up, warns insolvency and business turnaround specialist Jirsch Sutherland.
According to the Personal Insolvencies Quarterly Report from the Australian Financial Security Authority (AFSA) for the December 2023 quarter, business-related personal insolvencies accounted for over a quarter (27.3%) of all new personal insolvencies in the December quarter 2023. And in the latest monthly (January 2024) update, 222 people who entered into a formal personal insolvency were also involved in a business. Malcolm Howell, Jirsch Sutherland Partner, says that’s “to be expected”.
“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,” Howell says. “We’re now hitting that post-COVID lag timeframe, 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.”
Howell says 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%.
“The numbers are still low but I anticipate more individuals will take advantage of these agreements. 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,” Howell explains. “It’s a tailormade 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.”
Howell gives some sage advice: “It’s 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.”
Summary of the national figures from AFSA for the December quarter 2023
- There were 2,608 personal insolvencies
- 1,527 were bankruptcies
- 1,042 were debt agreements
- 37 were personal insolvency agreements
- 2 were insolvent deceased estates
- 713 personal insolvencies were business-related, up from 558 in the December quarter 2022.
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