Insolvent Company Directors
Companies faced with corporate insolvency and insolvent company directors, as recently seen looming in the North Queensland mining industry, such as Rockhampton amongst others. Companies like these set the scene for once-multimillion dollar business projects crashing down in debt with no real prospect of paying its creditors. When the dust has settled and payment is sought, it is likely that many heads will turn and point the finger at the company’s directors.
Directors owe duties to their companies. This is based on the nature of the director’s position, which is that of a non-owner of a company with the power to manage that company’s assets. However, directors’ duties are well regulated by the law, so as to avoid or deal with breaches that could constitute:
- Negligent exercise of a director’s powers (such as insolvent trading); or
- Self-interested activity (where the director gains a benefit at the expense of the company).
Sections 180 to 183 of the Corporations Act provide the statutory duties a director is expected to follow when exercising its powers over a company. These are the duties to act with care and due diligence, in good faith, and for the benefit of the company. If a director breaches its statutory duties, the court may order the director to pay compensation through section 1317J of the Act. This may be especially relevant if the director’s breach has negatively affected a company’s ability to pay its creditors.
Shadow and De Facto Insolvent Company Directors
Section 9 of the Corporations Act provides that a company director need not be formally appointed to fit into the definition of what is insolvent, and accordingly, to be bound by the duties associated with being a director of an insolvent company. If a person occupies or acts in the position of a director without being formally appointed, or has such an influence over the board of directors that they are accustomed to act in accordance with the person’s instructions, then it might be possible to hold that person responsible for breaches of director’s duties.
Ensuring you act in accordance with your duties as a director can help not only avoid corporate insolvency, but also to protect your interests as an individual even after insolvency, as directors may be personally liable for debts incurred by a company that is insolvent or unlikely to be able to pay its debts.
What happens if my company becomes insolvent?
When a company becomes insolvent, as an insolvent company director, a voluntary administrator or liquidator may be appointed to manage the company’s affairs. The first will try to ensure the survival of the company, whereas the latter is appointed usually after the board decides it’s best to wind up the company.
Liquidators have the power to investigate whether insolvent company directors engaged in any breaches of their duties to the company. Should the liquidator’s findings indicate that a insolvent company director breached its duties, it may be possible to hold the director personally liable for some or most of the assets lost by the company as a consequence of the breach, and in certain cases, recover compensation.
What to do as a Insolvent Company Director
If you, as a director of an insolvent company, suspect your company is in financial difficulty, it is advisable you seek professional advice immediately.
Even upon situations such as poor cash flow, creditors seeking payment and an ever increasing debt, you, as a director, can take steps to ensure you stop your company from becoming insolvent, or at least, protect yourself by taking all the reasonably necessary steps to avoid being held personally liable for the company’s insolvency.
Ensuring your actions as a director meet the standard duty of care and diligence, good faith and proving you reasonably acted for the benefit of the company could help avoid personal liability when faced with corporate insolvency.