Insolvent Trading

Directors have a positive duty to prevent corporations from trading if insolvent. A company will be defined as ‘insolvent’ if it is unable to pay its debts when they fall due. For Directors, this means they have a responsibility to consider the Company’s ability to pay a debt before incurring it. In order for a Director to make decisions as to the Company’s solvency, they must have a full understanding of the financial position of the Company.

Section 588G of the Corporations Act

A Director’s duty to prevent insolvent trading is founded in section 588G of the Corporations Act 2001 (Cth) (the ‘Corporations Act’). Section 588G requires a Director to prevent the company from incurring a new debt if the company is already insolvent but also prevent the company from incurring a debt which will lead to the company becoming insolvent.

Trading while insolvent – Penalties

Where a Director contravenes the civil penalty provision of section 588G the following orders may be made:

1. Compensation – The Director can be made personally liable for the loss suffered as a result of the failure to prevent the company from incurring debts while already insolvent;
2. Pecuniary penalty – The Director can be ordered to pay the Commonwealth up to $200,000.00. This order is only made where the Court finds the director’s failure is serious or prejudiced the company’s interest or its ability to pay creditors; and
3. Disqualification – The Court has the ability to disqualify a Director from managing a corporation of any period of time it considers is appropriate and justified.

If there is a contravention of the criminal penalty provision of section 588G the Court may order:

1. the Director pay a penalty of up to 2,000 units (currently $261,100.00); or
2. imprison the Director for up to five years.

Insolvent Trading Claim

Whilst a company is being wound up, liquidators have the ability to bring a claim for insolvent trading against the company’s directors. The purpose of this type of claim is usually to obtain compensation for the company’s creditors.

In order to bring a successful insolvent trading claim the liquidator must satisfy the Court of the following:

1. the person is a director of the company;
2. the company is actually insolvent;
3. the company had incurred a debt at the time of already having been insolvent; and
4. at the relevant time, there were reasonable grounds for the director to have suspected insolvency.

Bringing insolvent trading claims are time-consuming and can be expensive. As a consequence, many liquidators are averse to commencing such proceedings unless they can obtain funding to run such matters but creditors may be able to bring those actions themselves, in some situations.

Case Example

In the recent case of Inner West Demolition (NSW) Pty Ltd v Silk [2018] NSWDC 136 a creditor brought an action for insolvent trading against the sole director (Mr Silk). This case is important as it illustrates that creditors may bring an action for insolvent trading where the liquidator has consented or the relevant time period has elapsed.

The main facts of the case were that Inner West Demolition provided demolition services to One Build Pty Ltd, the company to which Mr Silk was the sole director. A debt for the demolition services was incurred in or around September and November 2013. One Build Pty Ltd was placed in voluntary administration on 26 November 2013 and then into liquidation in 13 December 2013.

The Court concluded that One Build Pty Ltd was insolvent from 30 June 2013, well before incurring the debt from Inner West Demolition. Mr Silk had failed to sufficiently rely on a defence under the Corporations Act as he was unable to show he had reasonable grounds for concluding the company was solvent past June 2013. Ultimately, the court awarded Inner West Demolition compensation in the amount of $327,332.00 to be paid by Mr Silk personally.

Insolvent Trading and Legal Advice

Trading while insolvent can be a serious offence under the Corporations Act and carries substantial penalties both civil and criminal. As outlined in Inner West Demolition (NSW) Pty Ltd v Silk it is imperative that a Director facing insolvency claims has full advice to their defences under the Corporations Act.

It is essential that you obtain the right legal advice for yourself or your company. If you are concerned you have contravened provisions of the Corporations Act or a liquidator had threatened legal action against you, it is important you seek legal advice.

Further and from a creditor’s point of view, there are instances where that creditor may be able to recover their losses from the directors of companies that have gone into liquidation.

If you have suffered loss because a company you have dealt with has gone into liquidation, you should consider if the liquidator will take action against the directors personally or if you are able to do that to look to recover your loss or part of it.

Here to Help

Proper experience in dealing with insolvent trading is essential. Aitken Whyte Lawyers Sunshine Coast are focused on results. Our litigation and disputes team will advise you on the proper course to take if you are the Director of a company which has traded insolvently or if you are a creditor of a company which is insolvent and you would like to make a Claim for insolvent trading.

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
Email Us