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What Duties Does a Director Have if the Company is Insolvent?

What Duties Does a Director Have if the Company is Insolvent?

What are you, as director, expected to do if your company is insolvent? Find out your responsibilities and liabilities here.

7th March 2019

One of your duties as director of your company is to monitor your company’s solvency regularly and not trade or cause more debt to the company if you suspect it is insolvent. Unless you are able to successfully resurrect your company, it will most likely be put under voluntary administration, liquidation, or receivership.

Each of these courses of action requires the director to act in different ways as this article will show.  

Voluntary Administration

Directors seek Voluntary Administration. This is where the Director(s) voluntarily appoint an independent Administrator to fully take over the running of the company. The primary role of the administrator is to try save the company. If they are able to make the company solvent again, the company will return to the directors. However, if the company cannot be saved, then the Administrator winds up the company and pays out creditors.

During administration, Directors lose control of their company. This means Directors have no liability for anything related to the company during this time. Nor do they control the way the Administrator runs the company. The only thing a Director does during this time is to assist the Administrator by providing documents, records or reports about the company.  

Liquidation

A creditor can seek Liquidation. The Liquidator duty is to ensure all the creditors are paid their debt either in full or part. They do not have any responsibility towards the company and are even authorised to sell the company and company property.

During this time, the Director’s loose all their powers and duties towards the company. Their responsibilities shift towards the creditors and they can be personally liable for any debts the company incurs unless your actions fall within the exceptions of the Safe Harbour Principle. The director assists the Liquidator as they do an Administrator. However, unlike an Administrator, a Liquidator will try to sue the director to help pay off creditors.  

Receivership

A secured creditor can seek Recivership. The primary role of a Receiver is to recover the debt owed to the creditor. They simply receive any property or income associated with the company and use it to pay the secured creditor. They do not, however, focus on running the company at all.

Directors should assist the Receiver as they would an Administrator. They are to give access to books, records, company property and assists with any other reasonable requests. Director’s powers and duties are not automatically rescinded in Receivership. Receivers only have powers that the security document gives them. The powers not covered in the security document still remain with the Director.

If you want more advice about your company’s solvency and your duty as a director, get in touch with a business lawyer today.

Unsure where to start? Contact a LawPath consultant on 1800 529 728 to learn more about customising legal documents and obtaining a fixed-fee quote from Australia’s largest legal marketplace.

Author
Naga Vamaraju

Naga Vamaraju is a legal intern at Lawpath as a part of the Content Writing team. She is in her final year of a Bachelor of Arts (Psychology) and Bachelor of Law Degree. She has a particular interest in the law surrounding starting and operating a business.