Liquidation
If, as a director, you believe your company is in financial trouble, seek professional accounting and legal advice as soon as you can.
It is imperative under Australian Legislation that a director of a company that is insolvent or likely to become insolvent in the foreseeable future acts responsibly. Australian Corporate Legislation specifically states that a director must not trade a company whilst insolvent. There is a fiduciary duty upon a director to take action in these circumstances which may result in punishable offences if you fail to do so.
A director may be held personally liable to compensate creditors for the amount of the unpaid debts, be subject to hefty fines or exposed to gaol time for failing to respond to insolvency.
Do not wait until it's too late.
Frequently Asked Questions
Insolvent trading occurs when a director allows a business to incur debts even though they are aware the business is unable to pay them as and when they fall due, rendering the business insolvent.
It is important to note that the duty to prevent insolvent trading also applies to any person acting in the position of director, even if they are not formally or validly appointed as a director.
Eligible employees are entitled to claim under the Federal Government Scheme known as the Fair Entitlement Guarantee Scheme (FEGS), which provides for various employee entitlements upon the insolvency of a business, however, it should be noted that FEGS does not cover outstanding superannuation.
There are a number of common factors that can indicate that your company is in financial distress. Being unable to pay critical creditors, staff superannuation and the Australian Taxation Office are the most common. Below are some of the signs the Australian Securities and Investments Commission states can indicate your company is undergoing financial difficulty:
A director may be held personally liable to compensate creditors for the amount of the unpaid debts incurred from the time the business became insolvent to the start of the liquidation.
In 2015, the Australian Securities and Investments Commission focused on insolvent trading by directors, noting that the following penalties can apply in certain circumstances:
The Corporations Act 2001 provides some statutory defences for directors, however, directors may find it difficult to rely upon these if they have not taken steps to keep themselves informed about the company's financial position.
As a director of a company in liquidation, you no longer have the ability to act on behalf of the company in any capacity, however, you do have the legal obligation to assist the liquidator when requested to do so. Some of the obligations of a director include:
Not necessarily. Many company directors fear that if their company goes into liquidation, they will also be made bankrupt. Unless guaranteed, the personal financial affairs of the director are separate from those of their company.
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