What is Insolvent Trading ?
Directors have a duty to prevent their companies from accruing debts whilst insolvent pursuant to 588G of the Corporations Act. If directors do not prevent their company from insolvent trading they may be held accountable.
Section 95A of the Corporations Act defines insolvency as where the company is unable to pay all of their debts as and when they become due and payable.
The following elements if satisfied constitute a breach of a director’s duty to prevent insolvent trading:
- A person is the director of a company at the time when the company incurs a debt;
- The company was insolvent when the debt was incurred or became insolvent due to incurring the debt;
- There were reasonable grounds for suspecting the company was or would become insolvent due to the debt being incurred at the time at which it was incurred; and
- A reasonable person or the director had no grounds to suspect that a company in the company’s circumstances would be aware.
What if I am unsure of or didn’t know the company was insolvent trading?
Directors have a duty of care and diligence. Accordingly, a director is not able to claim they were ignorant with regards to the insolvency of a company, because if they have not made appropriate enquiries into the finances of the company, they have not discharged their duty of care and diligence.
What are the penalties for insolvent trading?
The penalties for insolvent trading are harsh. The director may be liable for a civil and criminal penalty, which may involve both a fine and imprisonment for up to five years.
Are there any defences to insolvent trading?
Yes. There are four defences to insolvent trading, however research has found it is often difficult to come beneath their umbrella.
While most of our clients are located in Brisbane, Sydney and Melbourne, we work with businesses all across Australia. We look forward to assisting you, simply contact us now on 1300 793 226 for more information on whether you may be eligible for a defence to insolvent trading.
