Insolvency – What is it?

The Corporations Act 2001 (Cth) (the ‘Corporations Act’) provides that a person is solvent only if they are able to pay their debts when they fall due. Therefore, put simply a person who is unable to pay their debts is ‘insolvent’.

In the context of commercial law, courts are much more willing to take into consideration the commercial realities of trading. This may include for example creditors’ agreements with debtors to postpone payment of outstanding debts. Therefore, it will not always be straight forward whether a corporation is insolvent or not. The courts have however, consistently looked at a number of characteristics which will point towards insolvency. These characteristics or indications include:

• overdue taxes;
• creditor arrangements;
• issuing post-dated cheques;
• a history of dishonoured cheques;
• part payments to creditors (especially in round sums);
• bank demands; and
• letters of demand or statutory demands.

Insolvent Trading

Directors have a duty amongst other things, to ensure that they are properly informed of the company’s financial position and ensure the company does not trade if it is insolvent. This duty is a positive one and requires diligence on the part of the director to be consistently aware of the financial position of the company.

Director’s Liability

A Director will be held personally liable for insolvent trading under the Corporations Act where it is found:

• they were a director at the time the debt was incurred;
• the company was insolvent at the time or became insolvent as a result of the debt;
• the director has reasonable ground for suspecting insolvency; and
• a reasonable person in the position of director of a similar company in like circumstances would be aware of the company’s insolvency.

Where a director is found guilty of insolvent trading the court may impose a monetary penalty and order the individual personally compensate unsecured creditors. In additon, where it is found that the director acted dishonesty in failing to prevent incurring the debt, they may also face criminal charges.

A Director’s liability may however be excused where it can be argued that:

• there were reasonable founds to expect the company was solvent or would remain solvent when incurring the debt; or
• the director reasonably expected the company was solvent or would remain solvent on the basis of information provided by a competent and reliable subordinate; or
• the director was not engaged in the management of the company at the time due to a good reason or illness; or
• the director took all reasonable steps to prevent the company from incurring the debt.

Most of the defences outlined above are difficult to rely on unless the director has remained consistently informed of the company’s financial position. If you think you may be able to rely on one of these defences, it is important you seek legal advice.

Here to Help

Proper experience in dealing with corporate insolvency is essential. Aitken Whyte Lawyers are focused on results. Our commercial law team will advise you on the proper course to take if you are the director of a company which has traded insolvently, if you are owed a debt by a company you believe may be insolvent, or if you would like advice on your company’s status prior to incurring a debt.

Aitken Whyte Lawyers can assist you with all corporate insolvency matters.

Office Location and Contact Details

Sunshine Coast

Maroochydore
Aitken Whyte Lawyers
11/8 Pikki Street,
Maroochydore Qld 4558
Ph: +617 5408 0655
Fax: +617 3211 9311
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