28 Sep 2023
Checklist for lawyers advising directors of a company in financial distress
This checklist was produced by the expert legal writers of Practical Guidance Insolvency & Restructuring and sets out key matters to cover when advising a director of a company in financial distress.
While each company’s circumstances will be unique, directors of companies in financial distress should, at a minimum, consider the following actions.
Directors’ Actions Checklist | [emoticon:7e405c0fb3114c2594c00fd89a9d9667] |
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➝ Familiarise themselves with the following key duties:
For further details, see Directors’ guide to financial distress. (Subscriber content-log in to view) |
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➝ Ensure the timely and regular receipt of accurate financial information showing the company’s financial position, trading performance and forecasts of cash flows. |
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➝ Be aware of triggers for events of default under financial arrangements and key contracts. |
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➝ Obtain appropriate external advice, selecting advisers wisely:
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➝ To address insolvency or likely insolvency, directors should consider the following main options:
For further details, see Insolvency and restructuring options for companies. (Subscriber content-log in to view) |
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➝ Prepare, monitor and implement a plan to improve or otherwise address the financial position of the company. Do not delay as this is likely to lead to a worsening of the company’s position, potentially fewer options and increased exposure to personal liability. |
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➝ Hold regular board meetings and keep detailed minutes of matters concerning solvency, eg assessments of the company’s financial position, plans and meetings with advisors, insolvency practitioners and lawyers. Directors unable to attend meetings should keep themselves informed. |
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➝ Consider appropriate communications with lenders, lessors, third party asset owners and key suppliers. Their support may be critical if the company is looking to undertake a restructure, whether under the Corporations Act 2001 (Cth) or informally. |
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➝ Ensure employee entitlements are paid. Be aware:
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➝ Review the company’s tax position and reporting obligations. Be aware:
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➝ Take appropriate steps to prevent any misconduct by officers or employees of the company that could adversely affect the company's ability to pay all its debts. |
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➝ Directors should take steps to avoid personal liabilities:
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Why do company directors need to assess the solvency of the company?
A company director must monitor the solvency of the company given the duty to avoid insolvent trading and exposure to personal and criminal liability under the Corporations Act 2001 for failing to do so.
Directors’ statutory and fiduciary duties also require them to exercise their powers and duties with care and diligence, which includes a duty to consider the interests of creditors when a company is insolvent or nearing insolvency.
Insolvent trading also exposes a director to other personal liabilities, including under Australian Taxation Office director penalty notices and personal guarantees, and cause reputational issues.
Delay in addressing a company’s insolvency can lead to a range of negative consequences for both the company and the director personally.
The guidance note Directors’ guide to financial distress covers the following key considerations for a director of a company in financial distress:
- determining whether a company is insolvent under the applicable test;
- personal liability for insolvent trading;
- directors’ duties;
- potential voidable transactions including personal liabilities under them;
- options for an insolvent or near insolvent company, and
- the need for directors to act quickly given the consequences of delay or inaction.
Contact your Relationship Manager for more in depth information on our Practical Guidance Insolvency & Restructuring module. Alternatively email Sales.Enquiries@lexisnexis.com.au or call us on 1800 772 772.