bankruptcy
It is important to know exactly what you should do when your company becomes insolvent.

Insolvency across stakeholders: Directors

Insolvency can affect a whole range of stakeholders, as when running a business there is a whole a list of people to pay, this is especially the case when a business breaks apart. According to the Australian Securities and Investments Commission (ASIC), the three most common corporate insolvency procedures are liquidation, voluntary administration and receivership.

While each of these insolvency states are different, they all share a commonality – that many people are involved and affected.

Each stakeholder has a different angle and a unique viewpoint. For example, if individuals are hit by a corporation's insolvency, there is a different set of requirements involved in the processes they might take against that firm, versus a creditor and so on.

Below is a breakdown of the stakeholder options for a director of a firm, based upon instructions from ASIC and the Australian Financial Security Authority.

Insolvency for directors

What does a company director do when their business receives a notice from the Commissioner of Taxation for unpaid and unreported Pay As You Go? Or withholding or Superannuation Guarantee Charge amounts?

In both instances, the company director should immediately seek professional advice. Corporate Lifeline recommends that executives remember that they have an obligation to seek advice and stop trading. This is to be done immediately and throughout the period of time the business becomes and is insolvent. This action, while seeming drastic, is in order to avoid personal exposure.

When faced with personal liability, directors must follow all available advice, or risk jeopardising their future employment and career prospects.

What a director should do if their company is insolvent

If a company is insolvent, its director must not incur any further debt, according to ASIC. The primary duty of the director is to ensure compliance with the laws surrounding that specific industry. Additionally, a director must do everything in their power to put the needs and wishes of the primary stakeholders at the centre of their actions.

Although, if the company is heading towards insolvency, then the primary concern of the director should be to inform creditors – this includes employees who may have outstanding entitlements. 

The Corporations Act of 2001 requires that a company director or other officer "exercise their powers and discharge their duties with care and diligence".

But what does this mean?

There are some primary duties for directors, as imposed by this act. These functions are as follows:

  • The duty not to misuse information that has been obtained through a director's position. This is so a director may not gain any advantage or cause extreme detriment to the firm.
  • The duty to exercise a director's powers and obligations in good faith.
  • The requirement to exercise a director's powers and responsibilities – and taking the appropriate steps towards ensuring they have adequate information about the financial state of the firm – this includes ensuring the company doesn't trade if it is insolvent.

Is is essential that directors keep good books. According to ASIC, the failure of a director to take all reasonable steps in ensuring their company fulfils these requirements would be in direct opposition to the Corporations Act, and possibly illegal.

What are the outcomes?

There are many outcomes to insolvency for a business and a director. If a firm is found to be engaged in insolvent trading it can have serious repercussions for a director – this is why protocol must be followed, and primary duties adhered to.

If a company goes into external administration there can be negative outcomes for a director, and, according to the ASIC, they can vary depending upon the type of external administration. The director of a company must, therefore, assist the external administrator.

For more information on what to do if you are a director in charge of a company that is experiencing or might be about to experience insolvency, get in touch with Corporate Lifeline today.