We have seen a significant number of family-run businesses breakdown due to financial distress in the last twelve months. By the time a business is in financial distress, strained family relationships are often compounded further with money worries. If you're setting out to establish a business with family members, it is vital to recognise the inherent risks.
Here are some issues family-run businesses often encounter when experiencing financial distress:
Ineligible for FEG
When a business becomes insolvent, the government's Fair Entitlements Guarantee (FEG) scheme seeks to ensure employees are paid most, if not all of their outstanding entitlements. However, directors and their relatives are excluded from the scheme as a result of the perceived benefits that a related employee often receives before the liquidation.
In a liquidation, the Corporations Act 2001 asserts that when a dividend is available, employees have priority in being paid from that dividend before other unsecured creditors. For the director's family, the priority is limited to $2,000 for wages and superannuation plus $1,500 for leave entitlements. Any outstanding employee entitlement above these limits will rank as ordinary non-priority unsecured creditor claims in a liquidation.
In many instances, family members have roles in the business that they are unqualified to carry out. These roles tend to be accounting and financial control. Unfortunately, we see all too often poor financial management and bookkeeping contributing to the failure of a business.
Duties and liabilities as directors
When a family business is established, family members are often appointed as joint directors for simple reasons such as imparting dual ownership and responsibility or status of the title. Unfortunately, the number of directors only increases the risk and exposure to breaches of directors' duties and insolvent trading claims. If there is no function or benefit, families should consider the need for multiple directors in a small business.
Getting the right advice is paramount when running a family-owned business, as are the close-knit family relationships you maintain. We can assist with financial distress and have expertise in helping family-run businesses.
For a confidential discussion of your situation, please contact our team on 8304 9300.
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