Tuesday, 03 May 2016 10:07

Managing insolvency risk: when does trading on put you at risk?

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Being the Director of a company looks good, it's prestigious, and looks good on business cards. But it’s not all glamour and cocktail parties. By becoming a company director, you are exposed to the business’ risks and responsibilities that go with a directorship.

If business isn’t going so well, when is trading-on an option and when do you run the risk of breaching director duties?

First and foremost, look at the Companies Office director requirements.

If continuing to trade will end with you filing for bankruptcy, you’ll lose the ability to be a company director for three years. You can be discharged from bankruptcy after three years, but court orders can still prevent you from running a business.

How are you managing your insolvency risk? Will you find yourself lying to creditors about when they will be paid, shifting money from tax accounts to settle debts or perhaps working cash-jobs or paying employees under the table?

The New Zealand Companies Act (1993) requires directors to act in good faith in the best interests of the company. Essentially without malice, dishonesty and avoiding conflicts of interest by putting your own interests ahead of the company. When you apply that litmus test to most situations, you should have a clear idea whether or not you should continue trading or pause for thought.

If you are convicted of a crime involving dishonesty, this will prevent you from being a company director for 5 years, while a criminal record may stop you working in your industry altogether.

What’s happening in your industry? Prior to recent changes in New Zealand Health & Safety legislation, Sir Peter Jackson resigned as a director of Weta Workshop – the creative studio behind The Lord Of The Rings films. The law changes required him to be more involved on a daily basis, and Sir Peter didn’t feel he could deliver.

Health & Safety changes affect some businesses more than others, so it’s a good idea to keep up-to-date with issues in your field.

Each business is unique, and workplace codes of conduct may apply. Check your company’s Constitution, which should set out the rights, powers and duties of company directors. That important document may provide some framework around whether to continue trading or when you might be in breach of your directorial duties. It’s worth noting that if your company does not have a constitution, you’re governed by the New Zealand Companies Act (1993).

In any scenario, the best course of action for managing insolvency risk is to seek advice from the experienced team at McDonald Vague. Our business advisors can guide you, helping you avoid paths that might lead to bankruptcy, insolvency, or criminal activity. If you’re unsure, seeking help now can save you time, money, and a lot of stress in the long run.

Read 2169 times Last modified on Friday, 10 March 2017 12:57

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