What Happens to the Director when the Company Faces Insolvency?

When a company becomes insolvent, it can no longer meet its financial obligations. Being the director of an organisation experiencing financial difficulties can be scary. But what happens to the director of a company during liquidation? 

While some companies may be able to rectify the murky situation, others may be prone to become insolvent. And when that happens, the company directors have to act in the best interests of creditors and shareholders. 

The overall process of liquidation can be a long and complex one. People usually perceive directors as the main culprits behind the present condition of the company. If your company is facing insolvency, a liquidator may investigate your organisation’s historical affairs. 

Based on the findings, the liquidator may initiate actions against the directors if they were involved in insolvent trading. Directors can also face actions if they have executed any form of uncommercial transaction. 

The recovery proceedings against the company director may result in personal bankruptcy. If you are the director of an organisation facing liquidation, you should know your rights and responsibilities. It is necessary to consult with a reputed insolvency service in Australia to get quality advice.    

Liquidating a Company- Things you should Know 

When an organisation cannot pay its debts, the authorities need to restructure it. Restructuring a company refers to finding a way to find capital or decreasing its debt to a manageable level. In other situations, the company could be dismantled. 

Companies might be wound up voluntarily. It might also involve entering the phase of administration. It can also involve an administrator in conducting investigations. The administrators will report their findings to the creditors and suggest a course of action. The creditors can:

• Hand the organisation back 
• Enter into the deed of a company arrangement 
• Appoint a liquidator 

The court can also play an integral role in liquidating a company. 

Common Reasons behind Liquidation of Companies

Here are some of the common reasons why organisations liquidate. 

• The assets of the company are not sufficient to cover its debts and liabilities. In simple words, the company is unable to pay its debts. 
• The shareholders of the company decide that it should liquidate to pay its debts. 

Is the Company Director Liable for Debts during Insolvency?

Usually, the directors of a company aren’t liable when it enters liquidation. But there are a few exemptions to this rule. In specific circumstances, the directors can be responsible for debts. Here are some situations where the company directors may be liable for the debts. 

• The directors have offered a guarantee to the company’s debt 
• If the directors have been engaged in insolvent trading, they may be liable to face action 
• The directors have breached their duties during their tenure 

If you are a company director and its facing insolvency, you should seek advice from an insolvency service in Australia. 

What can Happen to the Directors of a Liquidated Company?

When a company faces liquidation, its assets are sold off. The proceeds can be utilised to pay off its debts. The directors aren’t directly responsible for the insolvency of the company. Here are some common things that can happen to the company’s directors when it enters the liquidation phase. 

The Directors Lose their Powers

In liquidation, the directors lose their powers and authority over their company. They won’t have the power to implement decisions. They also cannot control the assets of the company. However, company directors should assist the liquidators. 

Liability of the Directors when a Company Faces Insolvency

Directors may be personally liable if they have a personal guarantee over the debts of the organisation. Directors misusing funds can be liable for the debts of the company. 

Know your Options during the Liquidation Process

The end of a business can be hard for all the employees and stakeholders. However, it is essential to be aware of your options. Being the director, you have responsibilities to fulfil when it faces liquidation. Every company director facing insolvency should understand their role. By understanding your role, you can ensure that the company wounds up fairly. 

If you are facing liquidation, visiting Insolvency Australia would help. It is the only online marketplace in Australia where you can find more than 700 registered insolvency professionals. You can consult with these experts to seek quality advice.