Directors can become personally liable for the debts of the company if the directors allow the company to trade whilst insolvent.
We have talked about this risk to company directors in an earlier Blog post. Given this risk, what steps can be taken by a company director to not be in breach of company director duties? The Australian Securities & Investment Commission (ASIC) has lengthy ‘guidelines’ on this topic of the However, those guidelines are lengthy! For that reason, we include a summary here.
The ASIC Regulatory Guide (No. 217) on the duty to prevent insolvent trading recommends four key principles which company directors should always have in mind when thinking about the company’s financial fortunes:
- Directors must remain informed. This also means directors must ensure that the company maintains proper financial records and prepares relevant information for viewing by directors.
- Directors should investigate financial difficulties. If an iceberg is seen, even way off, directors must look into that to assess solvency and also have systems in place which give early warning of possible insolvency.
- Directors should obtain advice. If you have reason to suspect possible insolvency, it is wise to get thorough professional advice about how to address the company’s financial problems. If you do that, it could be part of the defence that you did everything reasonable to prevent insolvency.
- Directors should act in a timely manner. As soon as the iceberg is detectable, plans should be put together about what to do to avert disaster. This may include debt restructuring, in which case directors must actively monitor the restructure to a company possibly facing insolvency ensure debts are able to be paid when due.”
The ASIC ‘guidelines’ are not law, just a kind of outline of possibilities, but they are probably worth a look if you’re becoming a director.
If you have any questions about your duties as a company director, it’s best to obtain legal advice early on, and limit your exposure to personal liability for debts of the company.