Insolvent Trading

Insolvent trading assessments

As a director, you contravene the Insolvency provisions of the Corporations Act if:

you were a director when the company incurred the debt
the company was insolvent when the debt was incurred
there were reasonable grounds to suspect the company was insolvent or likely to become insolvent as a result of incurring the debt
a reasonable person in a similar position would be aware of the company's insolvency.

If the Liquidators believe you may have traded the company while insolvent, it’s up to them to prove the company was insolvent at the time debts were incurred.

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How assessments are made

Determining when a company became insolvent requires a detailed analysis of their financial position and an assessment of whether the company: was suffering continuing losses leading up to the insolvency had unpaid taxes and other unpaid statutory obligations had dishonoured and postdated cheques had special arrangements with its creditors had been paying creditors outside of normal terms and more.

The importance of keeping books and records

Where a company has failed to maintain adequate books and records, the Liquidator is able to rely on the presumption of insolvency. It then becomes your responsibility as director to prove the company was solvent at the time of incurring a debt, if you are to avoid personal liability.

With that in mind, it’s in your best interests to maintain clear and thorough business records at all times.

Insolvency is a complex matter. If you have questions or concerns, we’re here to help, with free initial advice.