In nearly all company liquidations there are a number of risks for directors. There are ways to mitigate these risks prior to the company entering liquidation. However, it is important to get professional advice about the risks for directors in liquidation at the earliest time possible. Otherwise, there is often nothing that can be done.
Article by Neil Mitchell, a Senior Manager at the Pearce & Heers Brisbane office.
This is Part 2 of our series covering Company Liquidation – Risk for Directors. The other parts can be accessed by the links below:
What are the most common risks for directors?
The most common risks for directors of insolvent companies or companies already in liquidation are:
- ATO Director Penalty Notices
- Director / Shareholder Loan Accounts
- Personal Guarantees
- QBCC Issues and Risks
- Insolvent Trading
- ASIC Director Banning
This article looks at the following Queensland Building & Construction Commission (QBCC) risks for companies and directors who hold QBCC licences:
- QBCC Deeds of Covenant and Assurance
- QBCC Excluded Individuals
- QBCC Home Owner Warranty Scheme
Please follow the above links to our articles which set out the other risks for directors.
QBCC Deeds of Covenant and Assurance
The most common issue we come across involving the QBCC and risks to directors involves Deeds of Covenant and Assurance.
A Licensee who does not meet QBCC net tangible assets requirements can rely on a Deed of Covenant and Assurance to effectively ‘bulk up’ the assets of the company. What this means is that under the Deed a third party, usually the director if the licensee is a company, pledges an amount to be made available if the Licensee goes bankrupt or goes into liquidation.
The amount payable under the Deed is based on an Independent Review Report and can increase or decrease over time. So, if worst comes to worst and the company enters liquidation, what was initially meant to be a guarantee of say $10,000 when the Deed was signed, could easily be significantly more than this.
If a company has a Deed and it is placed in liquidation, the Liquidator will seek to recover the amount payable under the Deed from the third party who provided it. And to make matters worse, the Deed provides for a charge over the third party’s property. So, if you sign a Deed as a director and you have a house, a Liquidator will be able to rely on the Deed to take security over your house and if the Liquidator’s claim is not met, possibly evict you.
So how do you get out of your liability under the Deed? Deeds can only be revoked if the request is made in writing to the QBCC and if not, remain enforceable even if the third party is no longer involved with the company. It is therefore important to make sure any Deed is revoked in writing if you are resigning as a director of a company, or shutting your company down.
It is also important to get advice from your accountant if you are asked to sign a Deed. Or, if you have a Deed and your company is approaching insolvency, from a qualified professional, like us at Pearce & Heers.
QBCC Excluded Individuals
The QBCC will make someone an excluded individual, meaning their building licence will be cancelled and/or they will not be able to obtain a building licence if they:
- Become bankrupt or enter into a Part IX or Part X Agreement; or
- Are a director or secretary of a building company in the year before the company is placed in liquidation or voluntary administration; or
- Are an influential person of a building company in the year before the company is placed in liquidation or voluntary administration.
The exclusion runs for three years for a first offence or if a person is involved in a second separate insolvency event, the person becomes excluded for life.
For further information about how the QBCC can make you an excluded individual including what constitutes an Influential Person of a building company, please refer to this article.
QBCC Homeowner Warranty Scheme
The QBCC provides insurance for homeowners for 6.5 years after work is done on certain constructions, including new dwellings to 3 stories and certain renovations.
If the construction is not completed by the builder or the construction contains defects, the QBCC covers the costs of completing the works or rectifying the defects if the builder fails to do so. The QBCC can then recover the costs from the builder and its directors. This includes directors who held the role when the work was performed and at time when the penalty is imposed, even if they’ve subsequently resigned from the role. It also includes where the QBCC rectifies defects after a company is placed in liquidation.
Contact us for Assistance
If any of the above risks apply to you and you would like advice on the potential consequences and the options available, please contact Pearce & Heers at our Brisbane or Gold Coast offices for an for an initial, obligation-free consultation.