In our recent post “What Is Insolvency?” we explained that when it comes to companies, insolvency is the inability of a company to pay its debts as and when they become due and payable. We also went through matters that might indicate a company is insolvent or is about to become insolvent. Insolvency is a matter that should be taken seriously as it can enliven parts of the Corporations Act that allow liquidators to recover money or property from directors thus piercing the corporate veil.
In this entry, we’ll look at the issue of insolvency trading.
The trading whilst insolvent provisions of the Corporations Act arise when:
- a person is a director of a company at a time when the company incurs a debt; and,
- the company is insolvent at that time, or becomes insolvent by incurring that debt, or by incurring at that time debts including that debt; and,
- at that time, there are reasonable grounds for suspecting that the company is insolvent, or would so become insolvent, as the case may be.
All directors have a duty to prevent insolvent trading. A liquidator will be able to prove that a director breached that duty if it can be demonstrated that the director failed to prevent the company from incurring the debt when:
- the director was aware that there were grounds for suspecting the company was insolvent or was going to become insolvent if it incurred the debt; or,
- a reasonable director in a like position in a company in the same circumstances would have been aware that there were grounds for suspecting the company was insolvent or was going to become insolvent if it incurred the debt.
Some of the matters that Liquidators and Courts look to are those which were identified in our earlier blog entry.
If a liquidator can prove that a director breached his or her duty to prevent the company from incurring debts whilst insolvent, the liquidator can usually sue the director personally for an amount equal to the amount of the debts incurred. Aside from being personally liable for the debts of the company, ASIC may become insolved and prosecute company directors for insolvent trading offences, seek orders that the directors are to pay a pecuniary penalty or seek orders disqualifying the directors from holding any office within an Australian company.
If you are concerned about corporate insolvency or insolvent trading, go to our contact page, send us an email or submit an enquiry using the form on the right side of your screen. Our professional staff are waiting to help you with your insolvency law needs.
