Your business is struggling financially. Can you sell assets, move operations or restructure the company before creditors take action?
Financial difficulties do not automatically mean a business must close. Australian companies may have options to restructure debts, negotiate with creditors or reorganise operations to improve their financial position.
However, there is a legal difference between legitimate business restructuring and moving assets or entering transactions that unfairly disadvantage creditors.
Under the Corporations Act 2001, directors must carefully consider their duties, particularly when their company is approaching insolvency.
When Should Directors Consider Restructuring?
Waiting until the business cannot pay its debts may limit your options.
Warning signs of financial distress include:
- Difficulty paying suppliers, employees or the Australian Taxation Office (ATO).
- Increasing creditor demands and overdue invoices.
- Reliance on new borrowing to meet existing obligations.
- Ongoing cash flow shortages despite continued trading.
A company is generally insolvent when it cannot pay its debts as and when they become due and payable.
Directors who suspect insolvency should promptly assess the company’s financial position and seek appropriate professional advice.
What Restructuring Options Are Available?
Depending on the company’s circumstances, Australian businesses may consider:
- Informal restructuring
Negotiating repayment arrangements, reducing operating costs, refinancing debts or selling non-essential assets to improve cash flow.
- Small Business Restructuring (SBR)
Eligible companies with total liabilities not exceeding $1 million may appoint a restructuring practitioner and propose a restructuring plan to creditors while directors retain control of the business, subject to statutory restrictions.
- Voluntary Administration
An independent administrator takes control of the company to assess whether the business can be rescued or creditors can achieve a better outcome than immediate liquidation.
Each option has different eligibility requirements, costs and legal consequences.
Can Directors Sell Company Assets Before Insolvency?
Yes, but the purpose, value and circumstances of the sale matter.
Selling business assets to generate working capital or repay debts may form part of a legitimate restructuring strategy.
However, transferring valuable company assets for less than their proper value, particularly where the transaction disadvantages creditors, can create significant legal risks.
Under section 588FDB of the Corporations Act, certain disposals of company property may constitute creditor-defeating dispositions.
For example, transferring valuable equipment to another company controlled by the same director for a nominal amount could attract scrutiny if it prevents creditors from accessing those assets.
Where the statutory requirements are satisfied, such transactions may be reversed through court proceedings or ASIC intervention.
What About Transactions With Related Companies or Family Members?
Transactions involving directors, shareholders, relatives or related businesses require particular care when a company is in financial difficulty.
Examples include:
- Selling company vehicles or equipment to a director’s family member.
- Transferring business operations to another company under common ownership.
- Repaying loans owed to directors or associated entities.
- Moving valuable contracts or intellectual property into a new business.
These transactions are not automatically unlawful. However, they may be challenged if they involve inadequate consideration, improper purposes, conflicts of interest or other grounds under insolvency law.
Directors should ensure transactions have a legitimate commercial purpose, are appropriately valued, properly documented and comply with their duties.
Can Directors Choose Which Creditors to Pay?
When creditors are demanding payment, directors may be tempted to prioritise certain debts.
However, payments made to particular unsecured creditors while a company is insolvent can sometimes be challenged as unfair preferences if the company subsequently enters liquidation.
A liquidator may investigate whether a creditor received more than they would have received through the ordinary liquidation process.
Not every payment made during financial distress is recoverable. The timing, nature of the transaction, statutory requirements and available defences are relevant.
Can Directors Continue Trading While Restructuring?
Directors must be particularly cautious about incurring new debts when a company is insolvent.
Under section 588G of the Corporations Act, directors may face personal liability for insolvent trading where the relevant legal requirements are met.
However, Australia’s safe harbour provisions, including section 588GA, may provide protection from civil insolvent trading liability for certain debts where directors are developing and pursuing a course of action reasonably likely to produce a better outcome than immediate administration or liquidation.
Safe harbour is not automatic and does not remove other directors’ duties.
What Happens If a Restructure Is Later Challenged?
If the company enters liquidation, a liquidator may investigate transactions completed before its collapse.
Depending on the circumstances, this can lead to:
- Recovery of assets or payments transferred improperly.
- Claims involving unfair preferences or uncommercial transactions.
- Investigations into breaches of directors’ duties.
- Personal liability or other legal consequences for directors.
The fact that a transaction occurred before liquidation does not automatically make it unlawful. Its legality depends on the circumstances and applicable statutory requirements.
Financially Distressed Business? Speak With NB Commercial Law Before Making Your Next Move.
A properly planned restructure may help preserve business value and provide a pathway through financial difficulties. Poorly executed transactions, however, can create additional legal and financial exposure.
NB Commercial Law assists Australian businesses and directors with:
- Commercial restructuring and legal risk assessments
- Business and asset sale agreements
- Related-party transactions and corporate governance
- Creditor negotiations and debt disputes
- Directors’ duties and insolvency-related legal advice
- Commercial disputes and litigation
Before transferring assets, restructuring debts or making major business decisions, understand your legal obligations.
Contact NB Commercial Law for practical legal advice on protecting your business interests and navigating complex restructuring decisions.