A director has a positive duty to prevent insolvent trading under s588G of the Corporations Act 2001 (Corporations Act).
Section 588G requires a director of a company to prevent the company from incurring a debt if:
- The company is already insolvent at the time the debt is incurred; or
- by incurring that debt, or by incurring a range of debts including that debt, the company becomes insolvent, and
- at the time of incurring the debt, there are reasonable grounds for suspecting that the company is already insolvent, or would become insolvent by incurring the debt.
In addition, a company must keep adequate financial records to correctly record and explain transactions and the company’s financial position and performance. A company will generally be presumed to have been insolvent throughout a period where it can be shown to have failed to keep adequate financial records.
There are various penalties and consequences of insolvent trading, including:
- civil penalties against directors, including pecuniary penalties of up to $200,000
- compensation payments are potentially unlimited and could lead to the personal bankruptcy of directors. The personal bankruptcy of a director disqualifies that director from continuing as a director or managing a company
- criminal charges – if dishonesty is found to be a factor in insolvent trading, a director may also be subject to criminal charges (which can lead to a fine of up to 2,000 penalty units or imprisonment for up to five years, or both).
The Australian Securities and Investments Commission, recommends that directors consult an appropriately qualified specialist insolvency accountant or lawyer, a financial advice service or a registered liquidator about their company’s financial situation as soon as possible if they suspect that the company cannot pay debts when they are due.
If you need any guidance or assistance with a corporate restructuring, insolvency or a personal bankruptcy matter, please contact one of the William Buck Business Recovery Specialists.