What is required to demonstrate insolvent trading
Directors contravene the Act if;
- They 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 like position would be aware of the company's insolvency
If the liquidators believe the director(s) may have traded the company while insolvent, it is up to them to show the company was insolvent at the time debts were incurred.
To determine when a company became insolvent requires a detailed analysis of the company's financial position and will include an assessment as to whether the company;
- was suffering continuing losses
- had unpaid taxes and other unpaid statutory obligations
- had dishonoured and post dated cheques
- had special arrangements with its creditors
- had been paying creditors outside of normal terms
- the list goes on.
It is important to note that the liquidators job is made easier where a company has failed to maintain adequate books and records. In these circumstances, the liquidator can rely on the presumption of insolvency and it then becomes the directors job to prove the company was solvent at the time of incurring a debt if he is to avoid personal liability for insolvent trading.
