Magazine article New Zealand Management

TABLED: What Directors Need to Know about Personal Liability

Magazine article New Zealand Management

TABLED: What Directors Need to Know about Personal Liability

Article excerpt

Byline: Nicholas Scott

You donCOt need me to tell you about the state of the current economic environment. For most in business, times are tough. As directors, there is the risk that in certain circumstances you can become liable for the debts of your company. Accordingly, the question you should ask yourself is what do I need to do as a director to avoid any personal liability?

The starting point for any director in running a successful business is to understand what the financial position of the company is. This is not just today, but knowing what the projected cash flow is, what significant obligations are looming and how much work is in the pipeline. Only if a director has a good handle on this, can informed decisions be made on the best way for the business to act.

However, this isnCOt just a common-sense requirement. The Companies Act requires that directors ensure their company keeps proper accounting records to enable the preparation of financial statements that comply with the Financial Reporting Act. What if accounting records arenCOt kept or financial statements prepared? If the company is insolvent and placed in liquidation, the Court may order that any or all of the directors be held personally responsible for the companyCOs unpaid debts if the failure to keep accounting records or prepare the financial statements contributed to failure of the company.

The greatest risk of personal liability is where a company is insolvent or is approaching insolvency. Directors have a duty not to allow the business to be carried on in a manner likely to create a substantial risk of serious loss to the companyCOs creditors, known as reckless trading. Similarly, directors must not allow a company to incur an obligation unless the director believes at the time that the company will be able to perform the obligation when it is required to do so. It is these duties liquidators allege have been breached when seeking to have directors held personally liable for the unpaid debts of a company.

When a company approaches insolvency, its directors must be very careful in how they act otherwise they risk becoming personally liable for a companyCOs debts. If you end up in this position, what can you do?

First, try to keep a cool head. Decisions must be made as to whether the fortunes of the company can be turned around. If not, the options available are usually to try to sell the business before it fails or, if too late, cause the company to cease trading so that it does not trade recklessly. …

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