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Insolvent Trading

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Insolvent Trading | Insolvency Lawyers Brisbane

Insolvent trading can carry serious consequences for a company and its directors. Contact our Brisbane lawyers if, due to insolvent trading, you are facing:

• civil penalties; or
• criminal charges.

If you are a company creditor, you may be able to recover your loss from a director of the company personally. We can assist you to bring a Claim for appropriate compensation.

Determining If a Company Is Solvent

Whether or not a company is solvent is a question of fact. To determine solvency, the company’s financial position must be considered in its entirety.

A solvent company is generally able to pay all its debts as and when they become due and payable or within a short time. It is acceptable if the company has assets that it can readily convert to cash for this purpose.

When determining solvency, a Court will also consider the commercial realities of trade. Therefore, other significant considerations include:

• the company’s ability to borrow on the security of its assets; and
• the willingness of secured creditors to continue lending despite temporary financial difficulties.

Insolvency

A person who enters into a contract with a company is not generally in a position to know if the company is solvent. The same can be said of an individual or business who extends credit to a company.

As such, directors of a company:

• are expected to have knowledge of the company’s operations including its books; and
• owe a duty to prevent the company from engaging in insolvent trading.

Directors may be held personally liable for debts incurred by the company if they fail in their duty. Penalties can include:

• civil penalties including significant fines;
• having to compensate creditors for their loss;
• disqualification from acting as the director of a company; and
• criminal charges leading to a fine and/or imprisonment.

Due to the serious consequences, it is imperative that you seek legal advice. Our Brisbane firm employs both experienced civil and criminal lawyers. We can provide you with comprehensive representation in the case of insolvent trading.

Director’s Liability

A director of a company contravenes the Corporations Act 2001 (Cth) (the Act) if:

• they fail to prevent the company from incurring a debt; and, when the debt is incurred
• they are the director of the company;
• the company is insolvent or the debt causes the company to become insolvent;
• there are reasonable grounds for suspecting the company is or will be insolvent; and
• they are, or a reasonable person in a similar position would be, aware there are grounds to so suspect.

Further, the director will have committed an offence if:

• all circumstances above apply; and
• their failure to prevent the company from incurring the debt was dishonest.

Holding A Company Director Personally Liable

A creditor or the liquidator of a company that is being wound up may look to pursue the company director. To bring proceedings for loss or damage, they must establish some or all of the following:

• the company director breached their duty and contravened the Act as set out above;
• creditor(s) suffered loss or damage from the debt due to the company’s insolvency; and
• the debt was wholly or partly unsecured when the loss or damage was suffered.

Determining If There Were Reasonable Grounds for Suspicion

In order for a director to have breached the Act by allowing the company to incur a debt while insolvent:

• there must have been grounds on which to suspect that the company was or would become insolvent; and
• the director must have been aware of those grounds; or
• the director should have been aware of the grounds as a reasonable person in their role would have been.

Acts that may give rise to reasonable grounds for suspicion of insolvency include if:

• the company is not trading profitably;
• the company exceeds its overdraft frequently and by large, unauthorised amounts;
• the company repeatedly fails to meet its loan obligations;
• cheques issued by the company are dishonoured regularly;
• cheques are signed but are not sent to creditors and are held back until the company receives funds;
• the company fails to pay superannuation contributions for employees;
• company debts are paid on the director’s personal credit card;
• the company seeks urgent short-term loans to pay bills; or
• the company sells assets at an undervalue to obtain access to cash to pay bills.

Defences To Insolvent Trading

If a director has a defence, they may be relieved of liability even if insolvent trading is proven.

There are four statutory defences to insolvent trading.

1. Belief of solvency

A director may have a defence if they can establish that, at the time the debt was incurred:

• they had reasonable grounds to expect that the company was and would remain solvent; and
• they made the necessary inquiries to inform themselves of the company’s finances; and
• based on the above they reasonably expected the company was solvent and would remain so.

2. Misinformed

A defence may also arise where another person provides information to the director. This is if, at the time the debt was incurred, the director had reasonable grounds to believe and did believe:

• another person was responsible for providing them with information about financial affairs;
• this person was competent and reliable; and
• this person was fulfilling their responsibility and providing adequate information to determine solvency.

It is not necessary that the other person was actually competent or reliable. It must only be proven that the director did not mistrust the person.

The director must also establish that based on the information they received:

• the company was solvent; and
• the company would remain solvent even if the debt was incurred.

3. Not managing the company at the relevant time

It is a defence if the director did not take part in the management of the company when the debt was incurred due to:

• serious illness; or
• another good reason.

Good reasons may be established if, for example:

• a director is an alternate director who only acts when a regular director cannot and was not acting at the time; or
• a director went overseas and requested another director be appointed in their place.

4. Attempted to prevent the company from incurring the debt

The final defence is that the director took all reasonable steps to prevent the debt.

Exonerating A Director from Civil Liability

A Court may also relieve a director of civil liability, in whole or in part, where:

• the director acted honestly; and
• having regard to all the circumstances of the case, the director ought fairly to be excused.

Focused On Results

If you have suffered a loss due to a company debtor’s insolvency, you may be able to file proceedings against:

• the company; and
• the company’s director(s).

Where a company is wound up, pursuing a director can mean you are still able to recover your money.

Our lawyers are experienced with this type of recovery action. We can advise you on whether, in the circumstances, the director can be held personally liable.

Conversely, if you are the director of a company accused of insolvent trading, you should look to:

• protect your company from winding up proceedings; and
• protect yourself personally.

Our lawyers can represent you for:

• contravention of a civil penalty provision; or
• a criminal offence in breach of the Corporation Act 2001 (Cth).

Aitken Whyte Lawyers Brisbane are focused on results.

Contact us on 07 3229 4459 if you require legal advice on insolvent trading as a:

• company director;
• company member; or
• creditor.

Aitken Whyte Lawyers can assist with all debt recovery and corporate insolvency matters.

Office Location and Contact Details

Brisbane

Aitken Whyte Lawyers Brisbane
2/414 Upper Roma Street
Brisbane QLD 4000

Ph: 07 3229 4459
Fax: +617 3211 9311
E: enquiries@awbrisbanelawyers.com.au