The Corporations Act imposes a clear duty of care on directors not to trade if your company is insolvent.
If your company is insolvent or at risk of becoming insolvent and you continue to trade-on, the consequences can be disastrous if the company later fails. You could become personally liable for the debts you incurred whilst the company was insolvent and you could also be criminally prosecuted.
If you are faced with these risks or possible risks, you should seek independent advice from a suitably qualified insolvency accountant as soon as possible. Here at Australian Insolvency Services we have fully qualified insolvency accountants who you can complete an assessment as to whether your company is solvent or insolvent. Having an insolvency assessment undertaken is critical if your company has been struggling to pay its debts for some time.
Call us today for a quote on 1800 210 073.
What are my duties as a Director?
Duty to prevent a company from trading if it is insolvent
The Corporations Act sets out clear duties for a director to avoid incurring a debt if the company is insolvent. A company is insolvent if it cannot pay its debts as and when they fall due. Accordingly, directors have an obligation to make an assessment as to whether their company is solvent, before they incur debts. This obligation is not only imposed on directors immediately before they incur the debt but also afterwards as a company can become insolvent as a result of a transaction.
Duty to keep books and records
The Corporations Act also sets out the director’s duties to maintain proper books and records for a company. Failure to keep proper books and records provides a liquidator with a presumption that the company was insolvent from the time that the books were not maintained properly. Therefore, if you are concerned that your company may become insolvent you should ensure that your books and records are brought up to date. Failure to keep proper books and records can also lead to prosecution.
What is required to maintain proper company books and records?
Most companies use electronic computer systems to record their transactions and the Corporations Act permits this but these systems must be kept up to date with all transactions entered and reconciled so proper financial statements could be prepared and audited at any given point in time. Furthermore, hard copies must be made available within a reasonable time to a person who is entitled to inspect the records. It is not acceptable for your “invoices and receipts” to be kept in a box and handed to your accountant at the end of the year.
How do I prevent my company from trading whilst insolvent?
If you suspect your company is insolvent or could become insolvent in the near future, you should not incur any fresh debts. Future supplies should be paid for up-front or paid for on delivery. In addition to this, you should undertake a thorough assessment of your company’s financial position every month so as to ensure that you are “paying back old debt” and getting “back into the black”. If you are not able to “pay back old debt” you should make an assessment as to whether you should continue to trade.
What are the consequences of trading whilst insolvent?
The Corporations Act sets out the penalties for insolvent trading. Usually claims for insolvent trading are taken by liquidators, however, claims can also be taken by ASIC or by creditors (with the liquidator’s consent).
Civil penalties
The courts can order a director to personally pay a civil penalty up to $200,000 upon a successful application by a liquidator, ASIC or a creditor.
Compensation proceedings
The courts can order a director to personally make a compensation payment upon a successful application by a liquidator, ASIC or a creditor.
A compensation order can be made in addition to civil penalties.
Unlike a civil penalty, a compensation order could be the combined value of the debts incurred whilst the company was found to be insolvent. If a director does not have the capacity to pay the compensation order it could lead to their personal bankruptcy. ASIC could also ban the director from acting as a director of other companies.
Criminal charges
If the Commercial Courts find any dishonesty or fraud in any insolvent trading case, they may refer the matter to the director of public prosecutions which could lead to a criminal prosecution and a fine of up to $220,000 and or imprisonment for up to 5 years. This could also lead to the director being banned from acting as a director of other companies.
ASIC has successfully prosecuted directors for allowing companies to incur debts when the company is insolvent, and has sought orders making directors personally liable for company debts. ASIC also runs a program to visit directors, where appropriate, to make them aware of their responsibilities to prevent insolvent trading.
What to do if you Suspect Insolvency
If you suspect your company may be insolvent you should have an independent assessment completed on the solvency of your company immediately. You could seek to rely in this assessment if insolvent trading proceedings were ever commenced against you by a liquidator.
If you are considering a company liquidation, then you should call the liquidation specialists on 1800 210 073.
We handle all types of liquidations and business insolvencies. Our Registered Liquidator is fully licensed by the Australian Securities and Investments Commission and has over 20 years experience in the insolvency profession. Call us today and we will happily provide a quote on a no obligation basis.
All calls to us are confidential and can also be anonymous if required. We look forward to speaking to you soon. Calls to our hotline are free on 1800 210 073.
