Avoiding insolvent trading claims
In light of what can happen if one struggles on and attempts, with the best of will, to save the company's business, it is better to cease trading and obtain appropriate advice rather than risk a jail term.
If however, one has struggled on and traded while insolvent, there is an alternative.
Deed of Company Arrangement
It is permissible under the Act to appoint a Voluntary Administrator and in circumstances where a director may have traded while insolvent, this type of appointment can potentially help.
Directors put up proposals to creditors through a Voluntary Administrator. If creditors accept the proposal, it will usually mean they have agreed to be paid a higher cents in the dollar return than they would have received if the company had simply been placed into liquidation.
If creditors agree to the proposal, the company enters into a Deed of Company Arrangement rather than going into Liquidation.
And by avoiding liquidation, in almost all cases, the directors avoid insolvent trading claims.
There is however one caveat. The ASIC has the power to prosecute directors for insolvent trading regardless of whether a Deed of Company Arrangement has been entered into. Such was the case in the Waterwheel case involving John Elliot.
