Q&As

Insolvency and the Issues that Arise for Directors and Officers

Wednesday February 15, 2017

Carl Huxtable, Senior Associate from Hall Chadwick joined Tori Smith of Legalwise Seminars to discuss insolvency and the potential issues that arise for directors and officers.

Over his 17 years in insolvency, Carl has seen many directors seek assistance too late, many unaware of what insolvency is, their obligations to preserve the interest of creditors over their own and the options available to them.

You can hear from Carl directly at the Directors and Officers: Risks, Liabilities and Insurance Conference on Friday 24 March at the Parmelia Hilton.

 

1. What are a few tips directors or officers should follow to stay on top of their company’s financial position?

  • Regular reporting on current assets and current liabilities
  • Maintaining realistic cash flow budgets
  • Reviewing forecasts regularly and adjusting for actual results and changes to the business’ needs

You will note all of the above deal with cash flow issues and not issues of profitability.

2. What do directors sometimes get wrong when insolvency issues arise?

  • Not seeking timely advice
  • Not seeking timely advice
  • Confusing profit with cash flow (insolvency deals with an ability to pay debts which is cash flow not net assets). Sure the business is making a profit but you need the cash to pay your bills
  • Increasing costs with the intention of increasing income (e.g. greater marketing budget, increasing commissions for sales staff) rather than re-assessing cost base and adjusting pricing or rationalising expenses to limit the cash drain

In addition, whilst maybe not insolvent, any event that affects recoveries or cash flow is a warning sign and usually the failure to adjust the forecasts and identify cash tight periods lead to a worse situation than originally faced

3. What might some directors and officers not realise or fully appreciate regarding insolvency and personal liability?

  • It is not a defence to ignore, or fail to take steps to make yourself aware of, the company’s finances
  • The Courts / Liquidators assess what a reasonable person in the position of the director might have done not necessarily what the director did
  • Failure to keep proper books and records allows the Liquidator and Court to presume insolvency rather than have to prove it

4. What are some of the big trends and developments you see ahead that might impact directors and officers?

  • The role of the pre-appointment advisor is increasing and will come under some scrutiny, especially where some advisors potentially cross into areas of phoenix companies, potential de-facto director roles and director protection strategies to defeat creditors. We will see a natural equilibrium arise in respect of what the advisor can and cannot do.
  • The proposed safe harbour amendments are intended to provide some protective measures where early intervention and pro-active steps are taken with a view to consider the exposure for creditors. The development of this regime will grow subject to how it is implemented – will it be a ‘defence to’ or a ‘protection from’ insolvent trading claims. Positively, the proposals are focused on incentivising directors to seek assistance earlier than try and slog it out by themselves.

As mentioned above, timely advice on the available options is paramount to considering your role as a director and the consequences of any actions / inaction.

You can hear from Carl directly at the Directors and Officers: Risks, Liabilities and Insurance Conference on Friday 24 March at the Parmelia Hilton.

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