Advising a director of a company that may be insolvent

1. Prevent the company from trading whilst insolvent

Company directors need to be aware that pursuant to s588G of the Corporations Act 2001 (Cth), they have a duty to prevent their company from trading whilst insolvent. If they breach this duty and the company continues to incur debts whilst insolvent, then a subsequently appointed liquidator may be able to seeks orders from a court that the directors of the company be held personally liable to compensate creditors for the amount of the unpaid debts incurred from the time the company became insolvent to the commencement of the liquidation.

For this reason, it is extremely important that directors take swift action to protect themselves if they believe that their company may potentially be insolvent, by seeking advice from properly a qualified insolvency practitioner and lawyer about whether or not the company ought to can be restructured and saved or should instead be placed immediately into voluntary administration and/or liquidation.

2. Attempt to restructure the company so that it can continue trading

Depending on the causes of a company’s financial circumstances it may be possible to salvage the company by way of a corporate restructure. Although there are a multitude of ways in which a restructure may be attempted,the major options available to directors are to:

  1. try and negotiate a repayment arrangement with the company’s creditors. Such an agreement can be made either informally via correspondence or formally by way of a deed;
  2. sell all or part of business of the company to a new entity (whether related or not); and/ or
  3. place the company into administration and try to negotiate a deed of company arrangement with the creditors.

A deed of company arrangement is a binding arrangement between a company and its creditors governing how the company’s affairs will be dealt with, which may be agreed to as a result of the company entering voluntary administration. It aims to maximise the chances of the company continuing, or to provide a better return for creditors than an immediate winding up of the company.

Rowe Bristol Lawyers have extensive experience in providing legal advice and services to directors who are concerned that their companies may be insolvent or near insolvency, including:

  • advising on whether a company is insolvent or near insolvency;
  • providing advice to directors on their personal legal rights and responsibilities including potential liabilities in the event of insolvency;                                                                          
  • advising company directors on how their options to try and restructure the company, including assisting directors to propose a deed of company arrangement to creditors;
  • assisting in drafting and negotiating a Deed of Company Arrangement (DOCA);
  • representing directors at meetings of creditors; and
  • advising in respect of liquidator’s reports.

If you require legal advice in respect of any aspect of corporate insolvency, please contact us to arrange a meeting so that we may consider and advise you on your specific circumstances.

The above information is provided as general information only and should not be relied upon as legal advice. The accuracy of this information may have changed from the date when it was published.