Experiencing financial difficulty

Experiencing financial difficulty? Start here

Experiencing financial difficulty does not necessarily mean your company is insolvent. However, it is a sign that you need to pay close attention to your company's financial position and act early if further problems emerge.

The earlier you understand your company’s financial position and take appropriate action, the more options you may have to stabilise the company and reduce the risk of more serious financial and legal consequences.

If your company is experiencing financial difficulty, you should:

• Check whether the company can pay its debts when they fall due — look at bank balances, overdue debts, bills due soon, tax, superannuation, wages, loan repayments and supplier payments.
  
  
• Seek independent professional advice early — speak to an accountant, lawyer or registered liquidator, and give them accurate and up-to-date information.
  
  
• Be cautious about taking on new debts — before accepting new work, taking deposits, borrowing money, or entering contracts, consider whether the company can meet the obligations that will result.
  
  
• Talk to your creditors – early honest conversations may lead to repayment plans or revised terms.
  
  
• Get financial records up to date — current records help you and your adviser understand the company’s position.
  
  
• Keep records of key decisions — note the advice you received, the options you considered and the steps you took.

Getting professional advice is important, but it does not remove your responsibilities as a director. You remain responsible for understanding the company's position, making decisions and taking appropriate action.

Be wary of quick fixes

If your company is experiencing financial difficulty, you may be approached by people offering quick fixes, informal restructuring services, new funding arrangements or ways to avoid creditors.

Be cautious about any proposal that requires you to:

• act urgently without obtaining advice
• accept new finance (especially if personal guarantees or other personal security is required)
• transfer company assets
• hide or destroy records
• favour certain creditors over others
• sign documents you do not understand.

Before taking action, obtain independent professional advice.

Phoenix activity is illegal

Be especially cautious if someone suggests transferring company assets or business operations to another entity to avoid paying debts, employees, creditors or tax obligations.

This type of conduct is commonly known as phoenix activity and is illegal.

If your company is experiencing financial difficulty, do not transfer company assets or business operations to another entity, or agree to arrangements designed to avoid creditors, without obtaining independent professional advice.

If someone suggests this type of arrangement, seek independent professional advice before taking any action.

Phoenix activity can have serious consequences for directors and others involved, including significant penalties and criminal sanctions.

Warning signs of financial difficulty

Financial difficulty can develop gradually. The warning signs below may indicate that a company is experiencing financial difficulty:

• overdue tax, superannuation, wages, suppliers or loan repayments
• dishonoured payments or overdrawn accounts
• maxed-out credit cards or overdrafts
• regularly juggling which bills to pay first
• creditor demands or threats of legal action
• relying on director loans, personal funds or customer deposits to keep operating
• taking on work the company may not be able to complete
• debts building up while waiting for future income.

These signs do not always mean the company is insolvent. However, they should prompt you to review the company's financial position, monitor it closely, seek appropriate advice, and document the steps you take.

If financial difficulties are ignored or not addressed appropriately, the company may become insolvent. Failing to respond to warning signs may also place you at risk of breaching your obligations as a director and can result in serious financial and legal consequences.

Your obligations as a director during financial difficulty

When a company experiences financial difficulty, you need to pay closer attention to the company's financial position and whether it can continue to pay its debts as and when they fall due.

Even if you receive assistance from accountants, bookkeepers or other advisers, you remain responsible for the decisions you make as a director. You should stay informed, ask questions where necessary, and take appropriate action when issues arise.

• Use care and diligence - Document your efforts to stay fully informed about the company’s financial position, cash flow, and risks.
  
  
• Act in good faith and in the company’s best interests - Make and document decisions that clearly help the company to survive. The decisions should have proper regard to the interests of creditors. Be wary of decisions that benefit you personally (or your family, friends or other associates).
  
  
• Do not misuse your position or information - You must not use your position or any information you learn through your role as director to benefit yourself or others in a way that harms the company. For example, do not transfer company assets or business away from the company.
  
  
• Prevent insolvent trading - Do not incur new debts if the company cannot, or may not be able to, pay them or existing debts.

If a liquidator is appointed, they may review whether directors have met their obligations. This may include considering whether the company traded while insolvent, whether proper records were kept, and whether company assets were used appropriately.

If you fail to meet your obligations as a director, you may face personal liability, civil penalties, disqualification from managing companies or, in serious cases, criminal prosecution. The best way to avoid this is by acting early if your company experiences financial difficult.

Your duty to prevent insolvent trading

You must consider whether the company can continue to pay its debts as and when they fall due before you incur any new debts.

Directors have a duty to prevent insolvent trading under section 588G of the Corporations Act 2001 (Corporations Act). You must not allow your company to:

• continue operating if it cannot pay its bills when they fall due, or
• take on new debts when the company is already struggling financially.

You must act if:

• you knew, or
• a reasonable director should have known,

that the company could not pay its debts when due and payable, and you allowed it to keep trading.

This duty applies even if you are the only director and shareholder. A company is a separate legal entity from you, and the insolvent trading provisions are designed to protect creditors and other businesses when a company runs into financial trouble.

If you seek professional advice when you see warning signs of financial difficulty, you will have a better understanding of your options to meet your legal duties. Delaying action increases your legal and personal risk.

If your company may be insolvent

If financial difficulties continue or worsen, you should seek professional advice as soon as possible. The earlier you act, the more options may be available to you and your company.

The appropriate option will depend on your company's circumstances. A registered liquidator, lawyer or accountant can help you understand what may be suitable.

If the company cannot pay its bills when due and payable, you must act quickly and responsibly to stop taking on new debt or other liabilities.

The options that you may have available include:

• Safe harbour - If your company is insolvent, or may become insolvent, you may be able to protect yourself from personal liability for insolvent trading. This may be available if, after you suspect the company may be insolvent, you start developing a course of action that is reasonably likely to lead to a better outcome than immediately appointing an administrator or liquidator. You must seek professional advice (for example, from a registered liquidator, accountant or lawyer) to rely on safe harbour protection.
  
  
• Restructuring - Some eligible small business companies can work with a registered liquidator to make a plan with creditors and try to get back on track. Directors stay in control of the business during this process. Creditors decide whether to accept the plan. See Small business restructuring and the restructuring plan on the ASIC website for further information on small business restructuring.
  
  
• Voluntary administration - An independent registered liquidator takes control of the company to assess its position and options. The aim is to determine whether the company or its business can be saved and, if not, achieve the best possible outcome for creditors.
  
  
• Liquidation - If the company can’t be saved, an independent registered liquidator takes control of the company so its affairs can be wound up in an orderly way for the benefit of creditors. A registered liquidator can advise you about the options available and the steps involved.

Avoid making financial difficulties worse

When a company is under financial pressure, some actions can increase the risk of further financial problems and potentially expose directors to greater legal risk.

Be cautious of:

• ignoring overdue tax, superannuation or supplier debts
• stop monitoring the company's financial position
• allowing financial records to become incomplete or outdated
• continuing taking on new debts without properly considering whether they can be paid
• relying on personal funds, credit cards or customer deposits to keep the business operating without addressing underlying problems
• delaying seeking professional advice
• avoiding communicating with creditors.

Steering clear of these habits will reduce the risk of your company facing, or falling into, insolvency.

If an external administrator/liquidator is appointed to your company

If an administrator or liquidator is appointed to your company, you must cooperate with them.

This may include:

• providing company books and records
• explaining company transactions
• providing information about company assets, liabilities and creditors
• assisting them to understand the company's financial position.

The administrator or liquidator may review the company’s affairs and consider whether directors complied with their obligations. This may include looking at whether the company traded while insolvent, whether records were kept properly, and whether company assets were dealt with appropriately.

If you are unsure what is required of you, get independent advice. It is a criminal offence to fail to assist an administrator or liquidator.

Take care of yourself

Financial difficulty can take a toll on wellbeing. Looking after your mental health is important while you take steps to stabilise the business.

If you’re feeling overwhelmed

• Reach out to mental health support services. One example is NewAccess for Small Business, a free coaching program run by Beyond Blue that helps small business owners manage stress and anxiety.
• If you need financial counselling, the Small Business Debt Helpline offers free, confidential advice for small businesses struggling with debt. Call 1800 413 828, Monday to Friday.
• Talk to trusted friends, family, or a professional counsellor.
• Remember that you’re not alone – many small business owners experience similar pressures.

Useful information

The Australian Tax Office (ATO) has a Business Viability Assessment Tool to help you assess your financial position and identify areas for improvement.