It is not uncommon for companies to face financial difficulties. Directors in Australia must be aware of the legal obligations to avoid consequences or penalties. One such obligation is the positive duty of directors to prevent insolvent trading contained in s 588G of the Corporations Act 2001 (Cth). A director has breached this duty if:
- they are a director of the company when the company incurs a debt; and
- the debt was incurred while the company was insolvent, or the company becomes insolvent by incurring the debt; and
- at the time the debt was incurred there were reasonable grounds for suspecting that the company was insolvent or would become insolvent as a result of the debt being incurred; and
- the director was aware that there are reasonable grounds for suspecting insolvency.
What is Insolvent Trading?
Insolvent trading continues to incur debts and/or trading the company whilst insolvent. Directors should be aware of the financial position of their company before incurring debts or taking on new liabilities. Directors and some company officials may face:
- Personal Liability;
- Compensation Orders;
- Civil Penalties; or
- Disqualification.
How do I know if am insolvent?
According to section 95A of the Corporations Act, companies are insolvent if they are unable to pay their debts as and when they fall due. You may have a suspicion that you are insolvent, or recognize some of the following signs in your company:
- Overdue tax bills
- Dishonored cheques
- Cash flow difficulties
- Payment plans or arrangements with suppliers
- Lack of ability to refinance loans
In order to avoid insolvent trading, it is wise to seek legal advice wherever there is doubt. In all cases, however, directors should always act in the best interests of creditors and consider and financial difficulties that the company may be vulnerable to.
Insolvent trading is a significant concern for directors and officers of Australian companies. To navigate this complex area of law, directors should prioritize financial transparency, seek professional advice, and consider safe harbor provisions when appropriate. Understanding and adhering to their legal obligations in times of financial distress is crucial to protect both their personal interests and the interests of creditors and shareholders.
If you have received a Statement of Claim or letter from a Liquidator regarding insolvent trading, please contact Roser Lawyers and speak to one of our friendly professionals.