7 important obligations and options for directors of financially distressed companies

Insolvency is on the rise as a result of many factors, including legacy supply issues, increasing interest rates, the tight labour market and genuine economic decline.

It is important in the current economic climate for directors of financially distressed companies to understand their obligations and options for dealing with their company.

1. Directors are duty bound to prevent a company from trading whilst insolvent.
2. Whether a company is insolvent or not can be complicated, but professional advisors and insolvency specialists can help you understand the solvency of your company.
3. If the company is insolvent, a director discharges their duty by appointing an insolvency practitioner to manage the affairs of the company.
4. For a company with less than $1 million in creditors, a small business restructuring practitioner may be appointed, enabling the business to continue to trade with the directors in control.
5. For a company with more than $1 million in creditors, a voluntary administrator may be appointed, who can assess the viability of the continuation of trade and restructuring options.
6. If there is a prospect of the company trading out of distress, directors can formulate a restructuring plan to take advantage of the safe harbour immunity from insolvent trading.
7. For a company in a fatal financial position with no prospect of improvement, it is likely necessary to appoint a liquidator to wind up the company’s affairs.

Our expert insolvency and restructuring practitioners have experience supporting corporate and private clients through times of distress, from managing insolvencies to restructuring and turnaround. Creditors and insolvency practitioners (whether administrators, liquidators or trustees in bankruptcy) also rely on our advice in relation to debt recovery, security enforcement and all aspects of insolvency administration.

Contact Justin Sharman to find out how our insolvency and restructuring team can assist your business.

This article provides general commentary only. It is not legal advice. Before acting on the basis of any material contained in this article, seek professional advice.

Co-author: Annabel Nettle

Practice: Disputes

Position: Associate