When a company is in financial difficulty, directors are often placed under immense pressure to keep the business afloat. However, it’s critical to understand that directors have legal duties that, if breached, can lead to serious personal consequences — including personal liability for company debts, legal claims being brought against them, disqualification from acting as a director, or prosecution.
The good news is that with early action and the right advice, you can minimise personal risk and make informed decisions that protect both yourself and the company.
At Pearce & Heers, we work with directors across a range of industries to help them navigate financial distress and avoid common legal and financial pitfalls. And here up some tips we have for directors.
1. Know Your Duties as a Director
Directors have strict obligations under the Corporations Act 2001, including to:
- Act with care and diligence
- Act in good faith and in the best interests of the company
- Avoid conflicts of interest
- Prevent the company from trading while insolvent
If you allow the company to incur debts when there are reasonable grounds to suspect it cannot pay them, you risk being personally liable for those debts. In many cases, this is avoidable with early and informed decision-making.
2. Recognise Early Warning Signs of Insolvency
Minimising personal risk starts with identifying when the company is heading into financial trouble. Common signs include (but are not limited to):
- Difficulty paying creditors, suppliers or employees on time
- ATO debts and payment plans
- A reliance on cash injections or new loans to stay afloat
- Dishonoured payments or maxed-out credit facilities
- Legal demands or winding-up notices
If any of these apply, it’s critical to act quickly. Continuing to trade in the hope things will improve can lead to further debt and potential liability.
3. Stop Incurring New Debts
Once there’s reason to suspect your company is insolvent, the priority must be to stop taking on new debts unless you are confident the company can pay them. This includes supplier accounts, lease obligations, or director-funded loans.
Continuing to incur debts at this point puts you at risk of insolvent trading, which is one of the most common causes of personal claims against directors.
4. Maintain Proper Financial Records
Keeping up-to-date and accurate financial records is essential — not just for compliance, but for assessing the company’s solvency and protecting yourself legally. Poor records can be used as evidence that a director failed to monitor the financial position of the company.
Essential documents include (but are not limited to):
- General ledger and journal entries — Showing day-to-day financial transactions
- Up-to-date balance sheet — Showing the company’s current financial position
- Profit and loss (P&L) statements — For tracking performance and expenses
- Cash flow forecasts and actuals — Especially important to assess solvency
- Aged creditor and debtor listings — Showing what’s owed and owing
- Tax records and ATO portals — Including BAS, IAS, PAYG, GST, and super reporting
- Bank statements and reconciliations — To verify cash movements
- Loan agreements and finance documentation — Including director loans
- Employment records — Particularly entitlements (wages, leave, superannuation)
- Company constitution and meeting minutes — To demonstrate proper decision-making
5. Engage a Qualified Advisor – Early
One of the most effective ways to reduce personal risk is to seek independent, specialist advice as early as possible. An experienced insolvency or restructuring practitioner can help assess your position and identify a plan of action that complies with the law and improves your outcomes.
At Pearce & Heers, we offer confidential consultations with directors in financial distress to help them understand their options and legal obligations — often well before a formal appointment is needed.
Final Thoughts
Directors facing financial distress often feel overwhelmed and unsure of their next move — but you’re not alone, and help is available. By recognising the warning signs early, taking action quickly, and engaging qualified professionals, you can protect yourself and give your business the best chance of survival.
If you’re concerned about your company’s financial position, get in touch with Pearce & Heers for a confidential, no-obligation consultation. Our team has helped hundreds of directors make the right decisions during difficult times.
