Company directors have a duty under the Corporations Act 2001 (Cth) to prevent a company from incurring debts where there are reasonable grounds to suspect that the company is insolvent, that is unable to pay its debts as and when they are due and payable.  Where directors breach this duty a Liquidator may pursue action against them personally to recover the loss or damage arising from the insolvent trading of the company.  The amount of an insolvent trading claim which a Liquidator is able to purse against a company’s director, or directors, is the total amount of the unpaid unsecured debts of the company which were incurred during the period which the company was insolvent.

Company directors and their advisors often face a difficult task in making a proper informed decision regarding whether or not a company is solvent or insolvent.  To assist directors and their advisors in situations where they suspect that a company may be insolvent, or may become insolvent, the Australian Securities & Investments Commission (“ASIC”) have published the following list of warning signs of insolvency¹:-

• Ongoing losses
• Poor cash flow
• Absence of a business plan
• Incomplete financial records or disorganised internal accounting procedures
• Lack of cash-flow forecasts and other budgets
• Increasing debt (liabilities greater than assets)
• Problems selling stock or collecting debts
• Unrecoverable loans to associated parties
• Creditors unpaid outside usual terms
• Solicitors’ letters, demands, summonses, judgements or warrants issued against your company
• Suppliers placing your company on cash-on-delivery (COD) terms
• Issuing post-dated cheques or dishonouring cheques
• Special arrangements with selected creditors
• Payments to creditors of rounded sums that are not reconcilable to specific invoices
• Overdraft limit reached or defaults on loan or interest payments
• Problems obtaining finance
• Change of bank, lender or increased monitoring/involvement by financier
• Inability to raise funds from shareholders
• Overdue taxes and superannuation liabilities
• Board disputes and director resignations, or loss of management personnel
• Increased level of complaints or queries raised with suppliers
• An expectation that the ‘next’ big job/sale/contract will save the company

The above list published by the ASIC is by no means exhaustive, and it is often difficult for company directors and their advisors to properly assess a company’s solvency given relevant indicia of insolvency and applicable law.  Accordingly, given the effects that the insolvent trading of a company may have on a company director’s personal financial position, company directors and their advisors may wish to obtain appropriate advice and assistance in circumstances where they consider that there is a risk of insolvent trading.

If you wish to discuss this article, or your circumstances, please don’t hesitate to contact Pearce & Heers Brisbane or Gold Coast office and our experienced staff will be able to assist you.

1. ASIC Information Sheet 42, “Insolvency: a guide for directors”, available from the ASIC website.