How the insolvency process works for directors

Dec 18, 2015 | Corporate Insolvency

There’s no denying that small businesses are a vital part of the Australian economy, and society as a whole. From a purely statistical point of view, the Treasury Department found that almost half of all private sector employment came from the country’s over two million SMEs.

Those are huge numbers, but what they don’t reveal is the importance of small businesses to our daily lives. Whether it’s the corner store where we buy our milk, the hairdresser where we have our regular trim or the mechanic where we get our vehicles serviced, our reliance on SMEs cannot be underestimated.

It’s alarming, then, that many SMEs are struggling to make ends meet. According to the Australian Securities and Investments Commission, 79 per cent of all companies that went into insolvency in the 2014-15 financial year had 20 employees or less.


The role of the director in insolvency


If you are the director of a company that has found themselves to be insolvent, there are certain guidelines you will need to follow throughout the process. The Australian Corporations Act (2001) states that, if there is a risk of insolvency, a director has a duty to:


  • exercise their powers and duties with care and diligence, and act in the best interests of the company;
  • not use their position to gain an advantage to the detriment of the company; and
  • never improperly use information obtained through their position to their advantage.


Alongside these rules, the circumstances of insolvency mean that you must ensure your business ceases trading, and you are diligently keeping all of your company’s financial records so that they can stand up to later scrutiny. Failing to meet either of these conditions places the director in breach of the Corporations Act, and can leave them liable for some hefty penalties.


How to navigate insolvency


There are a number of different ways to handle insolvency, but the most important thing to remember is your company cannot incur more debt. While some small businesses may find themselves able to restructure or obtain outside finance, in most cases the only available options are liquidation or voluntary administration.

Each approach has its own potential benefits and pitfalls, so it’s important you seek out the advice of experts to help you through the insolvency process. If your small business is experiencing any financial difficulty, the consultants at Corporate Lifeline are ready to help you however they can.


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