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As a company director you most likely do not want to be in a position where your company is heading towards a formal insolvency appointment (i.e. Liquidation or Voluntary Administration) because one of the main concerns could be around what this may mean to the employees of your company.

Breaking the news to your employees can be a stressful and difficult task, because there is the real possibility of closing the doors to your company and leaving your employees without a job.

So how and when is the best time to break the news? There is never a ‘good time’ but once the future of your company has been determined, employees should be advised in a timely manner (as soon as possible).

It has just been over a year now since the commencement of the new rules relating to creditors’ rights under the Insolvency Law Reform Act 2016 and the Insolvency Practice Rules which came into effect in September 2017. This has resulted in increased powers for creditors involved in External Administrations.

In this article the term ‘External Administrator’ relates to Liquidators, Voluntary Administrators and Deed Administrators and ‘External Administration’ has an associated meaning.

In our previous blog article, we introduced safe harbour and it’s benefits and the effect of restricting the enforceability of certain ipso facto clauses. This article will guide directors as to what they should be aware of relating to safe harbour.

Let us refresh your memory about safe harbour: designed to offer more protection to company directors and make it easier to restructure uncertain financial businesses. Safe harbour would apply to directors of companies undertaking a restructure, and would protect them from personal liability for insolvent trading laws in certain circumstances.

Back in September 2017, the Government changed Australian insolvency laws, some of these changes included:

  • The introduction of Safe Harbour protection for company directors facing insolvency.
  • Restricting the enforceability of certain Ipso Facto clauses.

As a director, you are probably thinking how does this affect me as a company director? Australian law imposes a duty on company directors to prevent a company from trading whilst insolvent. If you are a director, you can be personally liable for any debts incurred by a company trading whilst insolvent and might also have civil or criminal penalties imposed against you.

Just recently, the Australian Securities and Investments Commission (ASIC) released their quarterly statistics for June 2018, which highlighted the main key findings:

  • Q4 2018, shows a relative increase compared to the previous quarter of 12.4% in companies entering External Administration. Appointments totalled 2,038 compared to 1,813 in the previous quarter (this includes Scheme Administrator and Foreign/RAB Wind-Ups; and Members Voluntary Liquidations - these relate to solvent companies).

If you’re thinking your company is approaching insolvency (i.e. financial failure), the company’s cash flow shouldn’t be the only matter to consider and test. As a director you might want to look at the figures supporting your company’s balance sheet to fully comprehend the company’s solvency position.  

It is safe to say that a clear indicator of financial difficulty is a company’s inability to pay creditor debt on time and negative cash flow, but this could be a temporary issue only. A balance sheet test of insolvency can provide a better understanding of any financial difficulties your company might be tackling.

Once a company enters into a formal insolvency process like a Creditors Voluntary Liquidation or Voluntary Administration, creditors often do not fully use their legislative power available to them when it comes time to vote upon resolutions or proposals.

In a Creditors Voluntary Liquidation or Voluntary Administration, creditors do not have duties as such, rather they have rights as opposed to any obligations. In most cases, creditors have lost considerable amounts of money so it is in their best interest to get involved in voting at creditor meetings.

If you have received a Directors Penalty Notice (DPN) from the Australian Taxation Office (ATO) this should raise great concern and action needs to be taken urgently.

It’s important to note that there are 2 types of DPN’s that can be issued by the ATO, Lockdown and Non-Lockdown.

If you have been issued with a Lockdown DPN, the only option you have is to pay it (there is no escaping it and it cannot be cancelled) and under a Non-Lockdown DPN, you have 21 days to sort it out with limited available options detailed later on in this blog article.

A common concern we get at What is Liquidation from directors prior to placing their company into Creditors Voluntary Liquidation is that they have not maintained adequate books and records (or kept the financial records up to date).

Directors should be aware that a Liquidator is required to conduct an investigation into the business, property, affairs and financial circumstances of a company when the company has been placed into Creditors Voluntary Liquidation. In doing so, a thorough review of the books and records of the company is required.

This blog article will provide you with 5 important facts you need to know about your directors’ duties.

The Corporations Act 2001 (the Act) requires directors and offers of a company to exercise their powers and discharge their duties with care and diligence, if not and if breached can result in you being held personally liable (and no director wants that scenario!).

So here are 5 ways to help you with your directors’ duties: