ASIC has launched a new Small Business Director Essentials hub, bringing together practical information to help directors understand their responsibilities throughout the life of a company.
At first glance, it might look like another regulatory resource. For accountants, lawyers and business advisers, though, it is worth paying attention to.
The hub covers the director journey from establishing and running a company through to dealing with financial difficulty, restructuring and closing a business. It also provides guidance around director obligations and free learning resources designed to make those responsibilities easier to understand.
More importantly, the research behind the initiative highlights an issue advisers see regularly, directors often do not know what they do not know.
The knowledge gap is bigger than many directors realise
Before developing the new resources, ASIC surveyed 400 small business directors about how they understood and accessed information about their obligations. The findings are telling.
Almost half nominated a lack of time and resources as a barrier to keeping up with their obligations. The same proportion said there was simply too much regulation to stay on top of. The cost of professional advice was identified as another significant barrier.
Perhaps more concerning, 22% of directors surveyed had never accessed information or sought advice about their director obligations from any source. ASIC also found that one in three directors had little or no understanding of the consequences of breaching those obligations.
Directors are expected to understand their company’s financial position, take an active role in its affairs and ensure the company meets its legal obligations. ASIC specifically reminds directors that responsibility cannot simply be delegated to an accountant, bookkeeper or another adviser.
When a company begins experiencing financial pressure, that understanding becomes even more important.
Financial difficulty is often where the gap becomes obvious
Financial problems usually show up much earlier than the liquidation appointment.
Tax debt starts increasing, suppliers take longer to pay or begin pressing for payment, cashflow tightens and superannuation or other obligations become harder to meet. Directors inject personal funds into the business or borrow again to keep things moving.
ASIC’s research found that among directors whose companies had experienced financial difficulty during the previous 12 months, 55% had personally borrowed more money to put into the company, while 51% sought advice from an accountant.
Borrowing more money may provide temporary breathing room, but it does not necessarily fix the reason the business is under pressure in the first place. This is where earlier advice becomes critical.
As we regularly discuss at Insolvency Options, the earlier financial distress is identified, the more opportunity there generally is to assess what is actually happening and consider the available pathways. That may involve improving cashflow, restructuring debt, considering Small Business Restructuring or Voluntary Administration, or determining whether an orderly closure is the better commercial decision.
Waiting until creditor action forces the issue usually means fewer choices remain. This focus on acting early is also consistent with the wider Insolvency Options content strategy and previous guidance for advisers.
Accountants are already the first port of call
One of the most useful findings in ASIC’s research is the role accountants already play.
Among directors who had accessed information or sought advice about their obligations during the preceding 12 months, 87% had sought it from an accountant. By comparison, 46% had used ASIC’s website. That puts accountants in an important position.
You do not need to become an insolvency specialist. But you are often the person with the clearest view of what is happening inside the business. You can see when tax liabilities are increasing and when cashflow is deteriorating. You can see when drawings, director loans or personal borrowing are starting to mask a deeper problem.
With the existing relationship already there, you are often in the best position to start the conversation before financial difficulty becomes a crisis. That is also why having a specialist referral network matters.
The role of the insolvency practitioner should not be to replace the accountant or lawyer who has spent years building the client relationship. It should be to bring specialist knowledge into that relationship when it is needed, help assess the available options and allow the existing adviser to remain part of the conversation.
A practical resource for client conversations
ASIC’s Director Essentials hub can be useful in those early conversations because the advice is coming directly from the regulator.
Rather than waiting until a director is facing formal recovery action or an insolvency appointment, advisers can use the resource to help clients better understand:
- what being a director actually requires
- their responsibilities for understanding the company’s financial position
- what to consider when a company begins experiencing financial difficulty
- the importance of responding rather than avoiding the problem
- what needs to happen when a company is being restructured or closed
ASIC has deliberately built the resource around different stages of a company’s life, including situations where a business is under financial pressure. That makes it a useful education tool, but it should not be mistaken for individual professional advice.
Every distressed business is different. Its debts, assets, guarantees, tax position, employee obligations and prospects for future profitability all affect which options may be available.
Information is useful. Acting on it is what matters.
The value of ASIC’s new resource is that it makes director obligations easier to find and understand. The bigger opportunity for advisers is to use that information as the beginning of a conversation.
If a client is showing signs of financial difficulty, encourage them to understand their obligations, get their financial information up to date and seek specialist advice before the situation dictates the outcome for them. A conversation held early can be very different from one held after the ATO, a landlord or another creditor has already taken action.
For accountants and other advisers, becoming familiar with ASIC’s Small Business Director Essentials hub is a worthwhile first step. For directors, the message is understanding your obligations matters. If the numbers are starting to concern you, do not rely on information alone. Get advice while you still have options.
ASIC Small Business Director Essentials:
If you have a client experiencing financial difficulty and would like to discuss their circumstances confidentially, contact Insolvency Options. We work alongside accountants, lawyers and business advisers to understand the position, identify the available pathways and help clients make informed decisions before options narrow.