Corporations and Companies

Directors' Guide To A Painless Navigation Through Insolvency

Unfortunately, even the best companies sometimes become insolvent. You’ll be able to recognize this if your firm get into financial difficulties. Those difficulties will often include losses on daily basis, your cash flow is going thinner, and ultimately, you aren’t in the position to pay your creditors. In case you receive a director penalty notice, you are obligated to take suitable steps in the timeframe of 21 days.

Above mentioned notice will come from Commissioner of Taxation, and it will point to unpaid and unreported PAYG (Pay As You Go) withholding. Another notice will probably be connected to Superannuation Guarantee Charge (SGC), and your best move at this point is to hire professionals and seek their advice.

How to handle financial difficulty?

If you find that your company is in serious financial difficulty, you should gather paper accounting and legal advice quickly. Make sure to act fast, since time is not on your side once you get into this situation. Get well informed about available options after conducting a solvency review and you’ll increase chances to pull your company out of the abyss. Among possible options are restructuring, refinancing or pivoting your company’s activities. Another way to get help is to appoint an external administrator.

What to do in case of insolvency?

The only way to get a chance to save your firm is to stop any further debt. If refinancing, restructuring and other moves don’t help, you’ll probably have to appoint a voluntary administrator. The voluntary administrator is a highly qualified person that will take the full control over your company and try to save it in the shortest possible period of time. You’ll just have to provide the consent in writing before they start working on your firm’s insolvency.

What should a director do?

First of all, your responsibility is to facilitate compliance with laws that apply to your company. That way you’ll protect rights of your shareholders. If there is a risk of insolvency, the experts from a corporate insolvency firm recommend including your creditors and let them know about the situation. Director should follow general duties that are implied by the Corporations Act. Other than that, you should avoid trading while insolvent and make sure to keep adequate books and financial records.

Why should you avoid trading during insolvency?

The answer is simple: because of the consequences. If the director doesn’t abide The Corporations Act, numerous penalties will take place. First in line are civil penalties that can go up to $200,000. Another bad spot is compensation proceedings which can be proposed by ASIC, creditor or liquidator. These payments are pretty much unlimited and can lead to your bankruptcy. At the end, the director can be accused of dishonesty about trading during insolvency, therefore criminal charges will appear on the scene.

What are your rights as a director?

Once the voluntary administration is in, director loses the control of the company. The only way for a director to regain his leadership is through a deed of company arrangement. The rights of the director will be explained in deed’s terms. Next step is creditors’ meeting where external administration chooses either to call director to participate or not. They’ll probably include director since he’s obligated to provide information about company’s business and present it to creditors. In case the director went into liquidation with two or more companies in last 7 years, ASIC has the right to disqualify them from managing in duration up to five years.

How should you handle an external administration?

You as a director are under obligation to provide all information to the external administrator and cooperate fully. You have to let them know about the locations of all company property, then you should give them insight in your books and financial records. After that, you should mention other company records that are outside the firm, and provide their availability. The next step is to provide RATA (report about firm’s business, property, and financial condition) within 5-14 days, depending on the agreement with an external administrator.

The bottom line

In case you are an undischarged bankrupt or a part of a personal insolvency agreement which you haven’t complied with, you stop being a director and become disqualified from managing. The only way to continue working in that position is to get a leave by the Court. The penalty for continuing managing after disqualification can go up to $8,500 or 1 year in prison, or in some cases, both.

Get well informed about your rights and obligations in case of the company’s insolvency and act fast, since the law is very clear on this matter, and you shouldn’t take any risk. Gather the right people around you, and they could help you to rise above the situation, and get your company on its feet again.