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6 legal considerations for business directors facing insolvency

The inability to pay debts can be both financially and emotionally draining for business directors. In the December 2014 quarter alone, 1,122 individuals were deemed bankrupt as a result of their proprietary interest in a business, according to the Australian Bureau of Statistics.

Managing this difficult time can be challenging. Seeking financial and legal advice from commercial lawyers adept with debt recovery and insolvency would be a good plan. However, there are several wider legal considerations a business director facing insolvency should be aware of – here are six of them.

1. Be aware of your duties. 

Upon being deemed insolvent, or indeed even if there is a strong risk of insolvency, a business director is tasked with certain duties. Some are ethical, whilst others have legal obligations imposed by the Corporations Act.

A key duty is to is to keep conscientious books and records of all economic operations during the insolvency. Another is to safeguard the interests of all creditors involved, including stakeholders and employees. This involves not improperly using your position as director to further your own interests.

2. Do not trade while insolvent. 

It is your legal obligation to prevent your business from trading while it is insolvent. Since the business already owes debts, as the director it is your duty to disallow any further trade during insolvency.

3. Know the severe consequences for disobeying duties. 

Failure to abide by your duties can lead to crippling fines of up to $200,000 as pecuniary penalties. You could also face criminal charges if investigations into the insolvency find there was dishonesty involved, which could lead to up to five years in jail.

Seeking legal advice early can help manage insolvency better. Seeking legal advice early can help manage insolvency better.

4. Compensation proceedings against you could lead to bankruptcy. 

Creditors who suffer a financial loss as a result of the business’ insolvency may seek compensation proceedings from you personally. A liquidator may be hired by them to gain these funds, or alternatively the Australian Securities and Investments Commission is also entitled to intervene. Depending on your financial situation, repaying these compensations could lead to your bankruptcy.

5. Being deemed bankrupt could cost you your job as director. 

Under Australian law, if you enter into a personal insolvency agreement under Part X of the Bankruptcy Act 1966, you are automatically disqualified from running or managing any corporations. In this case, you would cease to be a director.

6. There are early warning signs and solutions to help. 

Insolvency charges are understandably stressful, however there are some early steps which can help. Usually the start of an insolvency process stems from receiving a s222AOE penalty notice from the Commissioner of Taxation informing you of your businesses’ unpaid taxes. This notice offers a two week window to respond, so seeking legal council early can help minimise the risks of insolvency down the road.

Protect your business with expert legal advice on insolvency. Protect your business with expert legal advice on insolvency.

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