The worsening economic climate requires directors’ focus to change
These are incredibly tough times. In the past few weeks alone, owners of businesses have navigated flash flooding, cyclones and unprecedented rainfall. We have all listened with amazement to the stories of survival and grieved for those that have lost their lives. It seems the last straw to add high inflation, political uncertainty and a recession into the mix.
This economic climate will see more insolvencies (where a company can no longer pay its debts as they fall due, or the value of its assets becomes less than its liabilities). In these circumstances, company law requires directors to shift their focus from protecting the company’s (and perhaps the owners) best interests to protecting creditors from losses.
If creditors’ interests are not considered, directors risk personal liability and may need to pay out of their own pockets for breaching their duties under the Companies Act. Penalties can also include terms of imprisonment of up to five years and fines of up to $200,000.
In order to comply, directors must demonstrate that they are:
- acting in good faith and in the best interests of the company;
- avoiding reckless trading (allowing a business to continue where there is a substantial risk of serious loss to the company’s creditors); and
- ensuring the company only incurs obligations that the director reasonably believes the company can perform.
If you want to assess your position and understand your options, please get in touch. While it can seem overwhelming, K3's corporate and commercial legal team can guide you to ensure you are properly protected and that you achieve the best outcomes for your stakeholders.