Insolvency for directors

This is Information Sheet 42 (INFO 42). It provides general information on insolvency for directors whose companies are in financial difficulty or are insolvent.

A company is insolvent when it cannot pay its debts when they are due. There are serious penalties for allowing your company to trade while insolvent. You should consult a registered liquidator, an appropriately qualified specialist insolvency accountant or lawyer, or a financial advice service about your company’s financial situation as soon as you suspect your company cannot pay debts when they are due.

Who is a director?

A director is not just a person formally appointed to that role. Under the Corporations Act 2001 (Corporations Act), a person may also be a director if they are not formally appointed but act in that role, or if the company’s directors act in accordance with that person’s instructions or wishes.

Directors’ duties

Your primary duty is to the company’s shareholders. You are also required to comply with general and specific laws applying to your company’s operations. However, if your company is insolvent, or there is a real risk of insolvency, your duties expand to include creditors (including employees with outstanding entitlements).

Consequences of insolvent trading

There are various penalties and consequences for insolvent trading, including civil penalties, compensation proceedings and criminal charges.

The Corporations Act provides some statutory defences for directors.However, directors may find it difficult to rely on these if they have not taken steps to stay informed about the company’s financial position.

What to do if you suspect financial difficulty

If you suspect your company is in financial difficulty, get professional accounting and/or legal advice as early as possible. This increases the likelihood the company will survive. Do not take a ‘head in the sand’ attitude, hoping that things will improve – they rarely do. Warning signs of insolvency include:

  • ongoing losses
  • poor cashflow
  • absence of a business plan
  • incomplete financial records or disorganised internal accounting procedures
  • lack of cashflow forecasts and other budgets
  • increasing debt (liabilities greater than assets)
  • problems selling stock or collecting debts
  • unrecoverable loans to associated parties
  • creditors unpaid outside usual terms
  • solicitors’ letters, demands, summonses, judgements or warrants issued against your company
  • suppliers placing your company on cash-on-delivery terms
  • special arrangements with selected creditors
  • payments to creditors of rounded sums that are not reconcilable to specific invoices
  • overdraft limit reached or defaults on loan or interest payments
  • problems obtaining finance
  • change of bank, lender or increased monitoring/involvement by financier
  • inability to raise funds from shareholders
  • overdue taxes and superannuation liabilities
  • board disputes and director resignations, or loss of management personnel
  • increased level of complaints or queries raised with suppliers, and
  • an expectation that the ‘next’ big job/sale/contract will save the company.

A registered liquidator or other suitably qualified adviser can conduct a solvency review of your company and outline available options. You need to be aware of your options so you can make informed decisions about your company’s future. Options may include refinancing, restructuring or changing your company’s activities, or appointing an external administrator.

What to do if your company is insolvent

If your company is insolvent, do not allow it to incur further debt. Unless it is possible to restructure, refinance or obtain equity funding to recapitalise the company, your options are to appoint a restructuring practitioner if your company meets the eligibility criteria, a voluntary administrator or a liquidator.

Consequences of external administration and receiverships

As well as the possibility of insolvent trading action, there are other consequences for directors when a company goes into external administration or receivership. These vary depending on the type of external administration.

More information

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Important notice

Please note that this information sheet is a summary giving you basic information about a particular topic. It does not cover the whole of the relevant law regarding that topic, and it is not a substitute for professional advice. We encourage you to seek your own professional advice to find out how the applicable laws apply to you, as it is your responsibility to determine your obligations.

You should also note that because this information sheet avoids legal language wherever possible, it might include some generalisations about the application of the law. Some provisions of the law referred to have exceptions or important qualifications. In most cases, your particular circumstances must be taken into account when determining how the law applies to you.

Information sheets provide concise guidance on a specific process or compliance issue or an overview of detailed guidance.

This information sheet was updated in December 2024.

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Last updated: 17/12/2024 03:22