Sometimes companies face difficulties. How you respond as a director matters significantly, both for the company and for your personal position.
Warning signs
Financial difficulty rarely appears overnight. Being alert to warning signs allows you to respond appropriately.
Watch for:
- Consistent late payment to suppliers
- Difficulty meeting payroll
- Increasing creditor pressure
- Reliance on delayed GST or PAYE payments
- Cash flow always tight despite good sales
- Key customer loss or contract termination
- Deteriorating relationship with bank
Director duties in difficulty
When a company is in financial difficulty, your duties shift. While normally you act in the interests of shareholders, when insolvency threatens, creditor interests become paramount.
The reckless trading provisions (s135 and s136) become critical. If you allow the company to continue trading when you know, or should know, it cannot meet its obligations, you may be personally liable.
Your options may include:
- Restructuring the business to return to viability
- Seeking additional capital from shareholders
- Negotiating with creditors for breathing room
- Formal insolvency arrangements (voluntary administration, compromise)
- Liquidation if the company cannot be saved
The key is to act promptly and take proper advice. Directors who recognise problems early and respond appropriately are far less likely to face personal liability than those who bury their heads in the sand.
Resignation
Sometimes the right answer is to resign. If you fundamentally disagree with the direction the company is taking, or if you cannot fulfil your duties, resignation may be appropriate.
However, resignation is not a magic shield. You remain liable for matters that occurred while you were a director. Resigning just before problems become public may look worse than staying and trying to address the issues.
Before resigning, consider:
- What are your reasons? Document them.
- Have you raised your concerns with other directors?
- Will your departure leave the company unable to function?
- Are there obligations you need to fulfil before leaving?
Where to get help
If you are facing difficulty as a director, the worst thing you can do is nothing. Seek professional advice early. Your options are always better before a crisis than during one.
What we do at this stage
We provide advice when things get difficult. Whether you are facing business challenges, considering resignation, or need to understand your position, we help you navigate the situation and protect yourself while doing the right thing for the company and its creditors.
Need to discuss your situation?
Whether you are taking on a new directorship, concerned about your current position, or facing a difficult situation, we are here to help you understand and meet your obligations.
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