Insolvency is a daunting reality for any business, and directors face a variety of challenges when navigating this treacherous terrain. The key lies in understanding the risks and responsibilities involved, especially when the question of continuing to trade arises. Principle Insolvency would like to explore the critical aspects that directors need to consider during such challenging times.
Understanding Director Responsibilities During Insolvency
The Companies Act 1993 lays down the foundation for director responsibilities in times of insolvency. Key obligations include:
• Making decisions that are in the best interests of the company.
• Exercising directorial power responsibly.
• Avoiding actions that pose substantial risks of serious loss to creditors.
• Demonstrating the care, diligence, and skill expected of a reasonable director.
• Ensuring the company’s ability to pay its debts and maintaining a positive asset-to-liability ratio.
Risks of Trading While Insolvent
• Civil Penalties: Directors can face civil penalties for reckless or negligent trading. The Financial Markets Authority and the Institute of Directors highlight that actions such as misleading creditors about the company’s financial health can lead to legal consequences.
• Criminal Charges: Breaching director duties, especially in a way that detrimentally affects the company or causes serious loss to creditors, can attract criminal liabilities. Under the Crimes Act 1961, offenses like theft or deception by a person in a special relationship carry severe penalties, including imprisonment.
• Loss of Director Role: Entering voluntary administration or liquidation results in the loss of control over the company’s management. However, proactive and creditor-focused actions can strengthen a director’s legal defense and facilitate negotiations with creditors holding personal guarantees.
Proactive Steps for Directors
• Seek Professional Advice: Directors should immediately seek advice from turnaround professionals to understand the options available for their struggling businesses.
• Consider Various Options: Options may include ceasing to trade, selling the business, restructuring, compromising with creditors, or initiating voluntary administration, liquidation, or receivership processes.
• Act with Integrity: Always prioritize honesty and the best interests of the business. If the company cannot pay its debts and continuing trade increases risks to creditors and personal liability, decisive action is necessary.
Insolvency Services in Auckland, Hamilton, Levin & New Zealand Wide
Directors must tread cautiously when dealing with insolvency. Balancing the interests of the company, creditors, and personal liabilities requires a nuanced understanding of the law and a proactive approach. While the path is fraught with risks, informed decision-making and integrity can guide directors through these challenging times. Insolvency does not always spell the end, it can be a turning point towards a more sustainable future for your business. If you are facing insolvency, call Principle Insolvency today.