What suggests a company may be financially distressed? What are directors' legal obligations? At what point should they seek advice?

Our guide explains the law, to help directors understand what they need to do.

Directors' general duties in an insolvency context

Insolvency speaks to a company's inability to pay its debts as and when they fall due for payment. It is assessed a matter of practical, commercial reality. It focuses primarily on the company's cash flow, as opposed to its balance sheet. It distinguishes between a temporary cash flow crisis, and an endemic lack of working capital, which can ultimately speak to structural deficiencies in the balance sheet.

When a company enters into an insolvency context, directors must exercise their duties, considering the best interests of creditors as a whole, as opposed to shareholders. Separately, the Corporations Act imposes a positive duty on directors to have their company stop incurring new debts if the company is insolvent, and there are reasonable grounds to suspect this to be the case.

Breaches of this duty can result in personal liability being imposed on directors for these new debts.

The safe harbour defence

The safe harbour defence seeks to encourage directors to save their business from liquidation before it's too late.

Since 2017, directors can seek to rely on an additional safe harbour defence to claims they should be made personally liable for new debts incurred in the safe harbour period. But they also bears the onus of proof. This means directors will need to prove that they acted proactively in undertaking a restructure of the company as soon as they suspected insolvency. Therefore, they need to keep a clear record of all the actions they took to save the company.

Understanding your obligations in an uncertain environment

The current economic situation and business conditions are putting many companies under strain.

Our guide helps directors understand what actions they need to take – and at what point in the insolvency context.

The MinterEllison team has a full-service capability to offer a whole-of-matter approach, assembling teams to service all aspects of an insolvency or restructuring transaction. This includes employment, tax, insurance, dispute resolution, corporate governance, project and finance, environmental, commercial, property and capital markets.