The perils of trading whilst insolvent

By 27 May, 2016 January 21st, 2019 No Comments

Directors owe a myriad of statutory and equitable duties to the company for which they serve.  One of the most important is to prevent the company trading whilst insolvent.

Statutory Liability

Under s 588G of the Corporations Act 2001 (Cth) directors have a duty to prevent insolvent trading by a company. This duty arises where:

  • a person is a director at the time the company incurs a debt; and
  • the company is insolvent at that time, or becomes insolvent by incurring that debt or debts, and
  • at that time there are reasonable grounds for suspecting the company is or would become insolvent by incurring the debt.

When a director is found to have contravened s 588G, various penalties and consequences may be enforced against the director, including: civil pecuniary penalties of up to $200,000, personal liability for debts incurred after the company became insolvent, and where a director’s failure to prevent the company incurring the debt was dishonest, he or she may be found guilty of a criminal offence and be liable to pay a fine and/or serve a term of imprisonment.

Signs of Solvency Distress

Sometimes it can be difficult to know when a company is in a ‘rough spot’ or when it is trading whilst insolvent. It is important for all company directors to know the signs of solvency distress so that proactive action can be taken to avoid insolvent trading. Common indicators of a company in financial distress are:

  • ongoing losses;
  • not being able to pay creditors within normal business terms;
  • problems obtaining finance; and
  • receipts of a director penalty notice from the Commissioner of Taxation for unpaid tax obligations.

Take Action

If you believe your company is insolvent or might become insolvent, it is important you take action on an urgent basis. As a precautionary measure, if you have any concern your company may be insolvent it is important not to let the company incur any further debt. You should contact a legal advisor and / or insolvency practitioner so your position can be better understood.

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