Financial resilience: Navigating financial distress and insolvency
Financial challenges can affect businesses at any stage of their lifecycle. While many companies successfully navigate periods of financial uncertainty, it is important for both directors and businesses to understand their responsibilities if insolvency becomes a possibility.
Taking advice early and understanding the legal framework can help preserve options, protect stakeholders and minimise potential liability.
Directors’ considerations when insolvency beckons
When a company faces financial difficulties, directors’ duties begin to shift. Generally, directors must act to promote the success of the company for the benefit of its shareholders as a whole, but when insolvency becomes a possibility, they must increasingly consider the interests of creditors.
The actions and decisions of the directors in the lead up to insolvency are likely to be scrutinised. If they are deemed not to have acted properly (or to have acted improperly), in some circumstances, directors may face personal liability or criminal sanctions. It is therefore imperative that directors are aware of, and understand the financial position of the company, at all times and take professional advice if something seems not quite right. Early action is often critical in protecting both the company and its directors.
Key practical steps for directors to take include:
- Closely monitoring the company’s financial position;
- Maintaining accurate financial records;
- Taking professional advice where appropriate;
- Avoiding transactions that could prejudice creditors; and
- Documenting decisions carefully.
Company considerations when insolvency beckons
If a company enters a formal insolvency process, certain historic transactions may be reviewed and challenged by insolvency practitioners, even if the transaction took place when the company was doing well financially.
Particular scrutiny may be given to:
- Preferences given to creditors;
- Transactions at an undervalue; and
- Transactions intended to defraud creditors.
These reviewable transactions are designed to ensure that creditors are treated fairly and that company assets are not improperly depleted before insolvency. Businesses should therefore exercise caution when entering into any significant transaction and records maintained and retained, for example, of the decisions made leading up to the transaction and any valuations obtained in relation to the transaction.
Recognising the warning signs
Potential indicators may include:
- Persistent cashflow issues;
- Increasing creditor pressure;
- Difficulties paying taxes;
- Breaches of lending covenants;
- Demands from key suppliers; and
- Declining profitability.
Taking action early
Financial difficulty does not always lead to insolvency. Many businesses successfully restructure, refinance or recover from challenging periods.
However, recognising warning signs early, taking professional advice and understanding the legal framework can significantly improve outcomes for stakeholders, and reduce the risk of claims against the company and/or the individual directors arising.
Contact us
Financial difficulties do not always lead to insolvency, but early advice can often create more options. Whether you are experiencing cashflow pressures, considering restructuring opportunities or facing potential insolvency, our Corporate, Restructuring and Dispute Resolution teams can help you assess the risks and identify practical solutions.
Contact us to discuss your circumstances and the options available to you.
Disclaimer: This note reflects the law as at 13 August 2026. The circumstances of each case vary and this note should not be relied upon in place of specific legal advice.
