Financial distress is a stressful time for directors in Australia, but you can navigate your situation successfully by understanding business insolvency and your options.
In fact, you have a legal obligation for specific insolvency director’s duties. But if you’re struggling to deal with the pressure, find peace of mind in our easy-to-understand guide to insolvency below. This includes the steps you need to follow to repay debts and navigate your legal situation.
What Happens to Directors of an Insolvent Company?
If a court decides that you, the director, have traded while insolvent, you may be liable for any debts. As there’s no limit to the financial amount, it’s imperative to address financial distress and find a suitable solution to insolvency.
But being the director of an insolvent company will be worrying, you may be able to resolve the situation with a strong outcome (continue to trade).
While the situation may prove a negative one if you don’t act quickly, if you do address financial distress, then you may be able to clear your debt and resume your career. Crucial to this outcome is how fast you act and your decisions to address outstanding debts.
Insolvency Director’s Duties During Financial Distress
If you’re the director of a company that has found itself to be insolvent, you must follow certain Australian guidelines. If there’s a risk of insolvency, The Australian Corporations Act 2001 states clearly the directors’ duties when a company is facing insolvency:
- Exercise their powers and duties with care and diligence and act in the company’s best interests.
- Not use their position to gain an advantage at the company’s detriment.
- Never improperly use information obtained through their position to their advantage.
Alongside these rules, insolvency circumstances mean you must ensure your business ceases trading and diligently keeps all of your company’s financial records to stand up to later scrutiny.
Failing to meet either of these conditions places the director in breach of the Corporations Act 2001.
If this is the case, director, liability, and insolvency may result in considerable penalties. This can include major fines and disqualification from higher management roles.
Understanding Director’s Duties in Insolvent Trading
There are several ways to handle a director’s liability for insolvent trading. The most important thing to remember is that your company cannot incur more debt. While some small businesses may be able to restructure or obtain outside finance, in most cases, the only available options are:
- Business liquidation
- Voluntary administration
- Business restructuring
Each approach has its own benefits and pitfalls, so it’s essential to seek the advice of experts to help you through the insolvency process.
If your small business is experiencing financial difficulty, refer to the three options below to consider the route for your company. Remember, your director’s duties in insolvency mean you must be able to demonstrate you pursued options to resolve your debt.
1. Liquidation
With business liquidation you would need to close your company, but it can be a viable way to cover your debts and minimise the personal responsibility you face. It’s a way to start a new professional chapter and wrap up a company in a dignified and legal way.
2. Voluntary Administration
With a voluntary administration application, it’s possible to avoid restructuring or liquidation. It involves having an external administrator appointed to evaluate your company and determine a way to address your financial distress.
3. Business Restructuring
Small business restructuring involves working with a practitioner to identify ways to return a company to regular trading. As there’s no one-size-fits-all solution, it’s essential to understand if this process would be suitable. You can speak to independent legal experts for guidance.
Director Facing Financial Distress? Get Expert Legal Advice
If you’re a director dealing with insolvency, we understand it’s a stressful time. That’s why our expert team offers a free opening consultation, so we can understand your situation and offer you a lifeline. Contact our team today—we’ve helped hundreds of directors find peace of mind.
Can You Be a Director After Insolvency?
It depends on the overall outcome of your financial distress, but yes, in Australia, you may be able to become a company director after insolvency. If you work for two companies that go bankrupt in the space of seven years, you will be disqualified. But if you are able to turn around a company’s financial distress, you will be able to continue.
