Insolvency Feature
Issue No. 46 - April/May 2009
Insolvency: effects on stakeholders
In the last edition of in-business we explained the mechanics of voluntary administration with emphasis on how the process would affect the company concerned.
In this issue, we look at the role stakeholders in the process - company directors, their families and creditors - play in the process.
Rob points out company directors’ duty is to ensure they have tight control on financial performance and seek appropriate advice earlier rather than later.
By acting quickly directors can restructure the company’s affairs, often through the voluntary administration procedure provided for in the Corporations Act. But sometimes the situation may not be salvageable and it is on those circumstances that we will focus.
Most SMEs in SA are family concerns with family members on the board of directors. What is important for stakeholders is to ensure their hard-earned wealth is not at risk should the family company suffer an irrecoverable insolvency event.
Here are some of the issues which may put stakeholders at risk.
1. Directors’ liability for insolvent trading
A company director has a duty to ensure the company does not trade while it is insolvent.
Basically, a company is insolvent if it cannot pay its liabilities as they become due. Having substantial fixed assets which would take time to realise will not resolve the issue.
If a director allows a company to trade while insolvent, the director may be personally liable for debts the company incurs while trading insolvent. Criminal sanctions may also apply.
2. Personal guarantees to suppliers Suppliers often pressure directors to provide guarantees before they will extend credit to the company. This makes the director personally liable to the supplier for the company’s debt to that supplier.
3. Directors drawing on loan accounts in
lieu of wages
This often occurs in smaller family companies where
the directors avoid paying tax on their sa...
