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Company Liquidation – Risks for Directors Part 3

In nearly all company liquidations there are a number of risks for directors. There are ways to mitigate these risks prior to the company entering liquidation. However, it is important to get professional advice about the risks for directors in liquidation at the earliest time possible. Otherwise, there is often nothing that can be done.

Article by Neil Mitchell, a Senior Manager at the Pearce & Heers Brisbane office.

This is Part 3 of our series covering Company Liquidation – Risk for Directors. The other parts can be accessed by the links below:

What are the most common risks for directors?

The most common risks for directors of insolvent companies or companies already in liquidation are:

This article looks and the risks of Insolvent Trading and ASIC Director Banning. Please follow the above links to our articles, which set out the other risks for directors.

Insolvent Trading

Perhaps the one thing we get asked about the most by directors of companies experiencing financial difficulty is; is there a risk of an insolvent trading claim?

A company is insolvent if it cannot pay its debts when they become due and payable. If you are concerned your company is insolvent, we have previously provided a list of matters to which you can refer to see if your company may be insolvent. We have also prepared a checklist that may help you.

If you continue to trade your company when it is insolvent and it’s then placed in liquidation, a Liquidator can pursue an insolvent trading claim for the value of all unpaid, unsecured debts incurred whilst your company was insolvent. A Liquidator can pursue an insolvent trading claim against all directors and/or a holding company. In addition, creditors can also pursue insolvent trading claims if they so desire.

There are certain defences to an insolvent trading claim, which we have previously summarised. However, the best thing to do is not to have to seek to rely on these defences and get professional advice if your company may be insolvent.

ASIC Director Banning

The ASIC can ban a person from being a director, if within 7 years prior to ASIC giving notice of such a banning:

  • The person has been an officer of 2 or more corporations; and
  • While the person was an officer, or within 12 months after they ceased to be an officer, a Liquidator was appointed.

So, how does ASIC decide whether it’s going to ban someone from being a director? Their decision is based on mandatory report(s) lodged with them by a Liquidator. ASIC will have regard to information in these report(s), and other information available, about how a director managed the company, whether the company was traded whilst insolvent and whether a director has breached their duties.

Even if a director is banned by ASIC, they can appeal to ASIC to have the ban lifted and then to the Court if they’re unsuccessful. We have assisted a number of directors to appeal to ASIC and as a result of these appeals (which all had merit), ASIC ultimately did not ban them from being directors.

Contact us for Assistance

If any of the above risks apply to you and you would like advice on the potential consequences and the options available, please contact Pearce & Heers at our Brisbane or Gold Coast offices for an initial, obligation-free consultation.

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We’re happy to answer any questions you may have, so please don’t hesitate to call us and schedule a consultation.

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