Debt Recovery, Bankruptcy & Insolvency

Insolvent Trading


Brisbane Lawyers

Aitken Whyte Lawyers Brisbane - Debt Recovery, Bankruptcy and Insolvency Lawyers And Solicitors For Brisbane, Queensland

Insolvency

As a general rule, a person who enters into any contract with a company or extends credit to a company, will not be in a position to know whether the company is solvent. As directors of the company are expected to have knowledge of the company’s operations including its books of account, they owe a duty to prevent the company from engaging in insolvent trading and may be held personally liable for debts incurred by the company if they fail to meet their duty

Director’s liability

Where:

  1. a person is a director of the company at the time when the company incurs a debt; and
  2. the company is insolvent at that time or becomes insolvent by incurring that debt or debts including that debt; and
  3. at that time there are reasonable grounds for suspecting that the company is insolvent or would become insolvent,

that person (a director) contravenes the Act (Corporations Act 2001 (Cth)) by failing to prevent the company from incurring the debt, if he/she or a reasonable person in a like position in the same circumstances is aware at that time that there are such grounds for so suspecting (section 588G(2))

and commits an offence if in addition to matters (1) to (3) mentioned above:

  • a director suspected at the time when the company incurred the debt that the company was insolvent or would become insolvent as a result of incurring that debt or other debts including that debt; and
  • the director’s failure to prevent the company incurring the debt was dishonest (section 588G(3)).

If a company is being wound up, its liquidator or a creditor may bring proceedings against the director to recover loss or damage, but they would need to establish some or all of the following matters:

  • that there has been a contravention of section 588G(2) by showing:
    • the company incurred the debt;
    • the company was insolvent at the time of incurring debt or became insolvent  by incurring that debt or other debts including that debt;
    • at that time there were reasonable grounds for suspecting that the company was insolvent or would become insolvent;
    • the director was aware or a reasonable person in a like position would be aware at that time that there were such grounds for suspecting;
  • that the creditor suffered loss or damage in relation to the debt because of the company’s insolvency;
  • that the debt was wholly or partly unsecured when the loss or damage was suffered.

Solvency of company

The question whether the company is insolvent is a question of fact to be ascertained from a consideration of the company’s financial position taken as a whole. It will generally be considered solvent if it is able to pay all its debts as and when they become due and payable or within a relatively short time. It would be acceptable for this purpose that the company’s assets are readily available to be converted to cash to pay debts. The company’s ability to borrow on the security of its own assets is a significant consideration to find solvency as well as the willingness of the company’s secured creditors to continue lending despite temporary financial difficulties.

“Reasonable grounds for suspicion”

Common indicators of insolvency which may provide reasonable grounds for suspicion are matters such as:

  • 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 written and signed, but are not sent to creditors and are held back until the company receives funds;
  • failing to pay superannuation contributions for employees;
  • paying company debts on the director’s personal credit card;
  • seeking urgent short-term loans to pay bills;
  • selling assets at an undervalue in order to obtain access to cash to pay bills, etc.

Defences to insolvent trading

Even if insolvent trading is established, a director may be relieved of liability if:

  • the director can establish one of the four statutory defences:

    1. that at the time the debt was incurred, the director had reasonable grounds to expect, and did expect, that the company was solvent and would remain so and that the director made the necessary inquiries to inform themselves of the company’s financial affairs.
    2. that at the time when the debt was incurred, the director had reasonable grounds to believe and believed that a competent and reliable person was responsible for providing the director with adequate information about the company’s solvency and that this other person was fulfilling their responsibility. Must also show that the director expected on the basis of the information provided by that other person, that the company was solvent and would remain so even if the debt was incurred. The director is not required to prove that the other person was actually competent and reliable, but only that he or she did not distrust that person.
    3. that because of a serious illness or some other good reason, he or she did not take part in the management of the company at the time the debt was incurred. “Good reason” may be established where an alternate director, who acts only when a regular director cannot do so, is not acting as a director when the debt is incurred and if a director goes overseas and requests another director to be appointed in their place.
    4. that the director took all reasonable steps to prevent the company from incurring the relevant debt.

  • or relief is alternatively granted under sections 1317S or 1318 by virtue of which the court may relieve a director, in whole or in part, from civil liability, where the director acted honestly and, having regard to all the circumstances of the case, the director ought fairly to be excused.

Office Location and Contact Details

Brisbane
Aitken Whyte Lawyers
Level 2, 303 Adelaide Street, Brisbane
Ph: +617 3229 4459
Fax: +617 3211 9311
E: enquiries@awbrisbanelawyers.com.au