Finding yourself trading insolvent could mean more than the demise of your business. In the event that company becomes insolvent, a director can be made personally liable for part of all of the outstanding company debts. With your family home and even bankruptcy on the line, there’s only one course of action – seek legal advice. By seeking early advice when you’re showing signs of becoming insolvent or have been notified of a claim, you can mitigate the risks.
Directors' Personal Protection
Is your business insolvent? You could be personally at risk.
Act quickly and mitigate risks
If you’re reading this then it’s likely you’re in financial distress or know someone who is. Don’t be among those clients that come to us when it’s almost too late. Whilst we have experience in flipping even the most dire scenario on its head, contacting us early will give you the brightest possible outcome.
Spotlight on the Law
What You Need to Know
It’s important to act fast, which is why we’ll cut straight to the key things you need to know when facing insolvency, so you can get on with the best course of action:
Despite a company and director existing as seperate legal entities. As a director, you can still be personally liable for company losses.
A company is often set up as a separate entity from its directors and shareholders to protect the interests of each party and usually under this setup, directors are not personally liable for the actions of the company. However, increasingly, creditors of debtor companies and ASIC are personally pursuing company directors for damages based on statutory claims or breaches of duties that have affected their own operations. What’s more, it’s legal and they can be successful.
According to the law, specifically the Corporations Act 2001 (Cth) (the ‘Act’), regardless of the business setup, if a director is deemed to be in breach of his/her duties, they can soon find themselves in serious trouble. Speaking to an insolvency lawyer can ensure you mitigate your personal risks and losses.
Acting in the best interests of your company and creditors in the face of financial distress or insolvency can mitigate personal liability.
The risks of personal liability for insolvent trading can cause directors to jump swiftly to appoint an administrator, regardless of whether the business shows prospects of survival. With mounting cases of early appointment, a law was brought out to incentivise directors to take early action when they know or suspect their company is insolvent.
The ‘Safe Harbour’ provisions are available to directors who show they are making positive steps in an attempt to save their company and repay outstanding debts, rather than moving to appoint an administrator. To find out more about Safe Harbour legislation and whether it applies to you, you should seek immediate advice from a legal professional.
Knowingly insolvent trading? You could be personally at risk.
Insolvent trading can have serious consequences for directors. In the event that the company director is found to be trading knowingly insolvent can mean they become personally liable for the totality of the company’s debts. If you’re concerned you may be in hot water, the only course of action is to contact an insolvency lawyer – fast – as you may have grounds for defence.
Signed off on personal guarantees? You may need to pay up.
A personal or director’s guarantee is an agreement formed between a company director and external creditor (individual or business) that guarantees personal payment of company debt in the event that the company is unable to make payment itself.
When you’re in the full swing of day-to-day business operations, experiencing positive cashflow and sailing ahead as planned, it’s easy to fairly thoughtlessly sign off on a personal guarantee so you can get on with securing the next business deal. However, when the next business deal doesn’t come, or the next, and the company finds itself unable to make payment for goods and/or services, you can swiftly find yourself out of pocket.
If you think you have signed personal guarantees, speak to lawyer and find out what you can do protect your personal assets.
Failed to pay taxation debts and superannuation contributions? The government can legally pursue.
Failed to stay up to date on PAYG and super contributions? Every director knows their obligations to comply with Pay As You Go (PAYG) withholding and Superannuation Guarantee Charge (SGC) obligations. Failure to do so will be considered non-compliance and a director can be personally liable for penalties.
Think you’re non-compliant or concerned about personal liability? Speak to a lawyer.
Blasé about your directors duties? Don’t be or you could find yourself seriously out of pocket, even personally bankrupt.
While most directors have the best interests of their company at the forefront of their mind, day-in and day-out, others are spread too thin and run the risk of dropping the ball on their duties and obligations. There are laws in place to make sure directors stay on the ball and consistently act in the best interests of the business.
- A director must exercise reasonable care and diligence
- A director must act in good faith and for a proper purpose
- A director must not use their position to gain personal advantage
- A director must not use information to gain personal advantage
The Corporations Act is in place to protect individuals and companies who engage in business and provides that where a breach of director’s duties is committed and the company suffers a loss, a director can be personally liable.
Do you think you may be in the firing line for a breach of your duties? Speak to an insolvency lawyer.
Planning to send your company into VA or liquidation and start over again? Beware of Phoenix activity - it’s illegal.
If you have, or are planning, to place your company into administration or liquidation to avoid payment of creditors and plan to continue the business under a new company name without proper value being paid for the business, think again.
In the insolvency world this is called ‘Phoenix’ activity and can result in civil and criminal penalties for directors – even a term of imprisonment. If you’ve got the sinking feeling that you may have engaged in this kind of activity or wish to seek advice about proper restructuring you should seek legal advice immediately because pursuit for illegal activity could crop up at any time.