Closing a business with debts: who is liable, what the options are and what to do first

Deciding to close is rarely a single decision. It is usually a slow accumulation of bad months, one sleepless week and a sudden question: if I stop, what happens to what I owe?

The honest answer is that it depends on three things: how the business is structured, what you’ve signed personally, and what you do between now and the last day of trading. This guide takes those in order. It doesn’t tell you to close or to carry on. It tells you what each path is likely to cost, so the decision is yours and made with clear eyes.

Does closing a business wipe out its debts?

No. Stopping trading ends the income, not the obligations.

Structure	Who is responsible for the business’s debts	What closing changes
Sole trader	You, personally, with no separation between you and the business	Nothing; debts follow you
Partnership	Each partner, generally for all of the partnership’s debts	Nothing; partners remain liable
Company	The company; directors are generally protected	Debts stay with the company, but directors can still be exposed
Trust with a corporate trustee	The trustee company, usually with the trust assets behind it	Depends on trust deed and guarantees

For a sole trader, “closing” mostly means ceasing to trade and managing creditors through arrangements. If debts are beyond reach, the formal personal options are covered by business loans after discharged bankruptcy and part IX debt agreements, and a financial counsellor can talk you through them.

For a company, the picture is better, but with exceptions that catch directors out.

How can a director still end up personally liable?

According to ASIC, there are several routes.

1. Personal guarantees. If you or a family member guaranteed a bank loan, equipment finance, a lease or a supplier account, the lender can pursue the guarantor. Check every document you’ve signed. Our personal guarantee glossary entry and the guide on business loans and personal guarantees explain how they work.
2. Director penalty notices. Where a company hasn’t paid withholding tax, GST or super, the ATO can pursue the directors for those amounts. ASIC warns that ignoring a notice past its deadline (14 or 21 days, depending on the type) opens the door to recovery against you personally. Our guide on what a director penalty notice means has the detail.
3. Insolvent trading. Directors must prevent the company incurring debts while insolvent. ASIC describes civil penalties for individuals that can reach 5,000 penalty units or triple the benefit or loss avoided, whichever is higher. Creditors can also seek compensation with no fixed ceiling, and dishonest conduct can lead to criminal charges. Poor records can also lead to a presumption that the company was insolvent.
4. Security over your home. If your house secures a company loan, the lender can enforce against it.

The point isn’t to frighten. It’s that “the company owes it” is only half the story, and the other half is on paper somewhere in your filing cabinet.

What options do you actually have?

Not every struggling business should close. ASIC sets out several paths for an insolvent company, and they’re worth knowing in order.

1. Keep trading with changes. Renegotiate with suppliers, agree an ATO payment plan, cut costs, refinance expensive debt. Our guides on refinancing out of expensive debt and talking to the ATO apply.

2. Safe harbour. ASIC says directors who suspect insolvency may be protected from civil insolvent trading liability if they start a course of action reasonably likely to give a better outcome than immediate administration or liquidation. This is a specialist area. Get advice, and keep your records and employee entitlements up to date.

3. Small business restructuring. A formal route for eligible small companies: you keep running things, and a registered practitioner guides the proposal you take to creditors. As at October 2026, commentary describes eligibility as liabilities of about $1 million, tax lodgements up to date and employee entitlements paid, with 20 business days to prepare a plan, a vote by creditors, and repayments over no more than three years. Confirm the current settings with ASIC or a registered liquidator, since details change.

4. Voluntary administration. An administrator takes control to try to save the company or its business, often through a deed of company arrangement. Directors lose control meanwhile. See voluntary administration.

5. Liquidation. A registered liquidator winds up the company, sells assets and distributes proceeds to creditors. For small companies there may be a simplified process. See liquidation.

6. Receivership. Usually started by a secured lender, not by you. It can happen quickly if a loan is in default.

What happens to employees and suppliers?

Wages and super come first in your mind and should. If an employer enters liquidation, eligible employees may be able to claim unpaid wages, annual and long service leave and some other entitlements under the Fair Entitlements Guarantee. The department says claims must be lodged within 12 months of the later of the end of employment or the employer’s liquidation, and contractors are generally not eligible.

Suppliers and other unsecured creditors are paid from whatever is left after secured creditors and costs. Your obligation to treat them fairly includes not paying one friendly creditor in preference to the rest in the weeks before a liquidation, since a liquidator can look back at those payments.

Example: a hospitality company at the crossroads

This is an illustrative scenario. A Hobart restaurant company owes $210k: $60k to the ATO, $90k to suppliers and a landlord, and a $60k loan guaranteed by the two directors. Takings have fallen for nine months.

The directors ring a free financial counsellor and then a registered liquidator. The liquidator looks at three paths. A restructuring plan would require all lodgements to be up to date, which they are not, so the accountant brings the BAS up to date first. A liquidation would end their exposure to the supplier debts but trigger the guarantee on the loan. Continuing with a payment plan might work if the landlord agrees to a lower rent for a year.

They choose to negotiate. The landlord agrees, the ATO accepts a plan, and the guaranteed loan is refinanced into a longer term, which cuts the monthly burden. A year later, the business is stable. Had the landlord refused, liquidation would have been the next step, and the directors would have known their personal exposure to the dollar before making it.

What should you do this week?

• List every debt, every guarantee and every security. Who holds what.
• Lodge what’s overdue. BAS, super and returns. Unlodged documents shrink your choices.
• Stop making preferential payments to friends, family or favoured suppliers until you have advice.
• Keep records. Poor records can hurt a director later.
• Book free, independent counselling through the Small Business Debt Helpline, 1800 413 828.
• For a company, speak to a registered liquidator sooner rather than later; many give the first chat for free.

If this is wearing you down, mental health and money stress for business owners lists free support.

Is a loan ever the right answer?

Sometimes, yes. If the problem is a timing gap and not a business that no longer works, a longer, cheaper facility to replace urgent debt can save a business that’s otherwise sound. That’s very different from borrowing to postpone a closure, which usually adds debt and personal exposure. A liquidator or accountant can help you tell which one you’re in. Our situation page on business loans after small business restructuring explains lending after the process.

Before you decide, see whether there’s a way to keep going

If you haven’t ruled out keeping the business, it costs nothing to see whether funding could change the picture. Tell us what you owe and what’s holding things up, and we’ll say plainly if we can help.

A straight answer on whether finance could help

We aren’t insolvency practitioners and we won’t pretend to be. But we do speak to owners deciding between closing and carrying on, and sometimes a restructured loan is the difference.

The enquiry form is a one-minute job. We don’t pull your credit file to receive it, and your details stay with us instead of travelling to a list of lenders. One of our people reads what you’ve written, then phones. If you can be exact about arrears, tax debts and who has guaranteed what, we can point you to something that fits, or say frankly that a liquidator is the better first stop.

See whether a restructure could keep you open →