Your Local Trusted Partners

Cash flow pressure, overdue tax and unpaid suppliers can build gradually, leaving company directors unsure whether the business is experiencing a temporary setback or may be insolvent. Recognising the warning signs and seeking advice early may preserve more options and help directors reduce their personal risk. A company is generally insolvent when it cannot pay its debts as and when they fall due. Financial difficulty does not always mean a business must close, but delays in seeking advice can reduce the restructuring options available, increase business losses and expose company directors to greater personal risk. Business Owner vs Company Director: What’s the Difference? A business owner is someone who owns all or part of a business, while a company director is formally appointed to manage a company and has specific legal responsibilities. In many small businesses, the owner is also a director, but this is not always the case – for example, a sole trader is a business owner but not a company director. Company directors are expected to stay informed about the company’s financial position and take action when warning signs emerge. Ignoring the problem or continuing to incur debts without a realistic ability to pay them may expose directors to serious consequences. Common Warning Signs of Insolvency Warning signs may include ongoing losses, poor cash flow, overdue tax or superannuation, suppliers being paid outside normal terms, increasing debt, difficulty collecting money owed to the business, reliance on personal funds, incomplete financial records, payment arrangements with selected creditors, demands or court documents and suppliers moving the company to cash-on-delivery terms. No single warning sign necessarily proves insolvency. However, directors should seek an immediate review of the company’s financial position when several signs occur together, debts cannot be paid on time or the company is relying on new borrowing or personal funds to meet existing obligations. What Are a Company Director’s Responsibilities? Company directors must understand the company’s operations and financial position, ensure proper records are kept and prevent the company from trading while insolvent. If insolvency is suspected, directors should investigate promptly and obtain appropriate accounting and legal advice. Directors should not rely solely on current bank balances. Cash flow forecasts, debts falling due, tax obligations, employee entitlements, available finance and the realistic recoverability of money owed to the company may all be relevant. What Can Happen If a Company Trades While Insolvent? Continuing to incur debts while insolvent can lead to civil penalties, compensation claims and, in serious cases, criminal consequences. Directors may also face scrutiny over transactions made shortly before an external administration, including payments that unfairly favour one creditor or transfers that remove company assets for less than their true value. What Should Company Directors Do First? Company directors should bring the company’s financial records up to date, prepare a realistic cash flow forecast and identify debts that are already overdue or will shortly fall due. This information can help professional advisers assess whether the company can continue trading and which restructuring or external administration options may remain available. Directors should also avoid selectively paying creditors or transferring assets without advice, as those transactions may later be challenged. Professional advice should be sought before entering new commitments, using personal funds, granting security, selling assets or agreeing to arrangements that may affect creditors. Could the Business Be Restructured? Depending on the company’s circumstances, options may include informal negotiations with creditors, safe harbour planning, small business restructuring, voluntary administration or liquidation. The most appropriate pathway will depend on whether the underlying business is viable, the level and type of debt, available assets and the support of key stakeholders. Early advice is important because some options require careful planning and may no longer be available once the company has exhausted its cash or creditor support. How CJM Lawyers Can Help CJM Lawyers can advise company directors experiencing financial distress, assess legal risk, explain restructuring and external administration options and work alongside accountants and registered insolvency practitioners. We can also assist with creditor negotiations, statutory demands, court proceedings and disputes involving liquidators or company transactions. If your company is struggling to pay debts when they fall due, has overdue tax or superannuation, or is relying on personal funds to meet ongoing expenses, contact CJM Lawyers early. Timely advice may help clarify whether the company is insolvent, preserve restructuring options and reduce the risk of the situation becoming more difficult to manage. Disclaimer: This article provides general information only and does not constitute legal advice. The information may not apply to your circumstances and should not be relied on as a substitute for tailored legal advice. If you need advice, please contact CJM Lawyers to speak with one of our legal professionals.