Checklist for lawyers advising directors of a company in financial distress

➝ Familiarise themselves with the following key duties:

• The duty to avoid insolvent trading, which carries the risk of personal liability, as well as the potential for civil penalties and criminal liability.
• The duty to have regard and give proper effect to the interests of the company’s creditors when the company is insolvent or nearing insolvency – any transaction which involves a real risk that creditors will be prejudiced should be considered carefully.

For further details, see Directors’ guide to financial distress. (Subscriber content-log in to view)

➝ Ensure the timely and regular receipt of accurate financial information showing the company’s financial position, trading performance and forecasts of cash flows.

➝ Be aware of triggers for events of default under financial arrangements and key contracts.

➝ Obtain appropriate external advice, selecting advisers wisely:

• If necessary, engage an accountant to assist with the preparation or review financial information e.g., to test cash flow assumptions.
• As appropriate, seek advice from a fully briefed and appropriately qualified insolvency professional.
• Avoid pre-insolvency advisers who may suggest illegal phoenix activity. See Illegal phoenix activity. (Subscriber content-log in to view)

➝ To address insolvency or likely insolvency, directors should consider the following main options:

• consensual restructuring outside of the formal insolvency processes, involving direct negotiation with individual creditors (if there is a risk of insolvent trading, ideally, this should be undertaken under the safe harbour provisions. See Using the safe-harbour provisions to avoid insolvent trading. (Subscriber content-log in to view);
• voluntary administration;
• debt restructuring for eligible companies with total liabilities not exceeding $1 million;
• creditors’ voluntary liquidation.

For further details, see Insolvency and restructuring options for companies. (Subscriber content-log in to view)

➝ Prepare, monitor and implement a plan to improve or otherwise address the financial position of the company. Do not delay as this is likely to lead to a worsening of the company’s position, potentially fewer options and increased exposure to personal liability.

➝ Hold regular board meetings and keep detailed minutes of matters concerning solvency, eg assessments of the company’s financial position, plans and meetings with advisors, insolvency practitioners and lawyers. Directors unable to attend meetings should keep themselves informed.

➝ Consider appropriate communications with lenders, lessors, third party asset owners and key suppliers. Their support may be critical if the company is looking to undertake a restructure, whether under the Corporations Act 2001 (Cth) or informally.

➝ Ensure employee entitlements are paid. Be aware:

• That a certain level of compliance is a condition for protection under the safe harbour provisions from insolvent trading liability; and
• if an eligible company intends to undertake debt restructuring under the Corporations Act 2001, employee entitlements must be up to date or there must be substantial compliance with that requirement.

➝ Review the company’s tax position and reporting obligations. Be aware:

• of potential personal liability of directors for pay as you go (PAYG), superannuation guarantee charges and goods and services tax (GST) under Australian Taxation Office director penalty notices.
• that a specified level of compliance with certain taxation laws is a condition for protection under the safe harbour provisions from insolvent trading liability; and
• if an eligible company intends to undertake debt restructuring under the Corporations Act, 2001 before a restructuring plan may be sent to creditors, tax lodgments must be up to date or there must be substantial compliance with that requirement.

➝ Take appropriate steps to prevent any misconduct by officers or employees of the company that could adversely affect the company's ability to pay all its debts.

➝ Directors should take steps to avoid personal liabilities:

• Directors’ exposure to insolvent trading liability increases with each new debt incurred while the company is insolvent and personal liabilities under guarantees and ATO director penalty notices may also increase over time.
• Be careful not to invest further personal funds or give personal guarantees or personal assets as security for the company’s liabilities if it is likely that the business cannot be salvaged.
• Directors should be conscious that if the company is ultimately wound up, the liquidator can obtain court orders in respect of pre-liquidation voidable transactions including, in some circumstances, against directors personally.