DIRECTORS DUTIES – DEALING WITH FINANCIAL DIFFICULTIES

The Australian economy is experiencing tough economic conditions and many sectors are affected. In these tough times we just want to remind directors of their duties when faced with financial difficulty and how should they deal with the situation.

Directors in Australia face onerous duties if their company is experiencing financial difficulties. The most significant risk for directors is the duty to prevent a company from trading whilst insolvent. A company is deemed insolvent when it cannot pay its debts as and when they fall due. Failing to guard against insolvent trading may result in the director being personally liable for debts incurred during the period it was deemed to be insolvent.

So if a company is in financial difficulty, what should directors do?

• Be proactive and act early and quickly. The director should avoid putting their head in the sand and hope the problem will go away!
•  Increase the monitoring of the financial position of the company including increased monitoring of the company’s bank balances, cash flow, current assets and current liabilities. The profit and loss should be reviewed to ensure avoidance of ongoing losses. Overdue taxes, outstanding BAS lodgements or stringing out trade creditors are the main warning signs.
• Ensure financial records are in good shape. The inability to produce timely and accurate financial information can impact on a director’s ability to make informed decisions.
• Directors should seek legal and financial advice to ensure they understand all their options. Directors of companies often rely upon the injection of capital from an asset sale or loan but often this can be too late. Directors should contact Optima Partners sooner rather than later. If we feel the need, we can put you in touch with legal professionals or a restructuring and turnaround practitioner.

A restructuring and turnaround practitioner would review the following:

• Management structures, financial systems and key personnel.
• Bank facilities and other debts.
• Cash flow and working capital and options to improve working capital.
• Trading performance and implementation of measures to improve financial and operational performance.
• The ability to raise additional funds through equity or debt raising, or the disposal of assets.
• Negotiations with impacted parties including lenders, employees, creditors, landlords, major customers.
• As a last resort they would advise whether appointment of an Administrator and/or Receiver may be required to restructure and save a business.

Taking early action to restructure and turnaround a business can dramatically increase the chances of trading out of financial difficulty and minimising the impact on your creditors and employees. It also reduces the risk of insolvent trading.

Finally, should things not improve and the worst happens directors need to assess their personal exposure. In family business it is common for directors to provide guarantees to financiers, landlords and creditors. Directors should get an understanding of their exposure by quantifying the potential personal debt. There may also be ATO obligations they face as a Director, unpaid PAYG withholding and superannuation guarantee can be imposed personally on a director under a Director’s Penalty notice. A plan needs to be put in place as to how these creditors are to be handled.

This can be a tough time for directors. Acting early and getting the best advice is critical to getting the best result from a tough situation.

Please contact us at Optima Partners if you are experiencing financial difficulty in your business.

PHIL CARULLI  CA

DIRECTOR – OPTIMA PARTNERS