What you owe and to whom

Three words get used interchangeably in the first month, and the difference between them matters more than almost anything else you'll read here: broke, insolvent, and bankrupt.

Broke means you personally don't have much cash. It's a bank balance problem. Painful, but not a legal status.

Insolvent is a legal term for the business: it means the company can't pay its debts as and when they fall due. This is the trigger for a director's legal obligations under Australian law — once a company is insolvent, a director who keeps trading and racking up new debt can become personally liable for those debts under insolvent trading provisions. This is why the call in the last module happens before you make any more decisions, not after.

Bankrupt is a personal legal status, not a business one. It only applies to you as an individual, and only if you can't pay your personal debts — which usually only becomes relevant if you've personally guaranteed business debts and the business can't cover them.

Most men who come to this journey are somewhere in the first two, worried they're heading for the third. Knowing which one you're actually in changes what you do next.

The personal guarantee question

If you signed a personal guarantee for a lease, an equipment loan, or a business line of credit, that debt doesn't disappear when the business does. The company might be wound up; the guarantee follows you. This is the single biggest source of "how is this still my problem" in the weeks after a business fails.

Find every guarantee you've signed. Leases are the most commonly forgotten one — check the lease document itself, not just what you remember agreeing to.

Who gets paid first (and why it's not who you'd expect)

In a formal wind-up, there's a legislated order of priority. Roughly, in Australia:

1. Costs of the liquidation itself.
2. Employee entitlements — wages, super, leave. This is deliberately ahead of everything else.
3. Secured creditors, up to the value of their security (equipment finance, a bank with a registered charge).
4. The ATO and other unsecured creditors, generally pooled together and paid pro-rata from what's left.
5. You, as a shareholder, last — if there's anything left, which there usually isn't.

Two things surprise most directors here. First, staff entitlements sit ahead of the tax office, not behind it. Second, "the ATO" isn't a single monolithic creditor that gets special treatment over your local supplier — GST, PAYG withholding, and super guarantee debts do have some specific mechanisms (like the Director Penalty Notice regime, covered below), but general company tax debt sits in the unsecured pool with everyone else.

The Director Penalty Notice — the one that follows you personally

This is the mechanism most directors don't know exists until they get one. If a company fails to pay PAYG withholding, GST, or superannuation guarantee amounts and doesn't lodge on time, the ATO can issue a Director Penalty Notice making the director personally liable for those specific debts — separate from any personal guarantee, separate from limited liability. Lodging on time, even if you can't pay, changes your options significantly. This is worth raising specifically with whoever you engage in week one.

What actually happens if you can't pay

For the business: voluntary administration, liquidation, or in smaller cases simply deregistration if there are no assets and no creditors pushing the issue. Which path fits depends on whether there's anything worth salvaging and how many creditors are involved. This is exactly what the insolvency practitioner from module one is for — it's not a decision to make from a spreadsheet at midnight.

For you personally: if you've got personal guarantees you can't cover, options range from negotiated payment plans with the creditor, to a personal insolvency agreement, to bankruptcy as the last resort — which in Australia typically runs three years and has real but not permanent consequences (it affects your credit file, certain jobs, and travel, but it ends).

None of this is a verdict on you as a person or as a business owner. It's a legal process for an economic event. The next module is about the conversation that actually determines how this feels — the one with your partner.