Determining when a company is insolvent can be quite complex, so professional advice should always be sought. However, as a brief overview, a company is insolvent when it is unable to pay amounts it owes to creditors when they become due and payable.
Directors of companies are duty-bound to prevent their company from trading if it is insolvent. If a company continues to trade whilst insolvent, the director (or directors) are guilty of insolvent trading and may be liable to pay penalties. They may also be personally liable for the debts that are incurred by the company!
To pursue a claim against the director for insolvent trading, it is important to establish the following:
- The person was a director of the company at the time it became insolvent;
- During the period of insolvency, the director permitted the company to incur debt(s) which remain unpaid; and
- At the relevant time, the director had reasonable grounds for suspecting that the company was insolvent.
An insolvent trading claim against a director is limited to the amount of any unpaid debt(s) which the company incurred whilst it was insolvent. The director does not automatically become liable to satisfy all unpaid debts of the company.
Successful claims may result in a director being disqualified from managing a company, fined up to $200,000 and/or ordered to pay compensation. In some cases, criminal proceedings may also follow.
In defending a claim for insolvent trading, directors must be able to show one or more of the following:
- They had reasonable grounds to expect the company was solvent;
- They were relying on a competent and reliable person to produce or provide financial information regarding the company and based on the information actually provided, the director reasonably believed that the company was solvent;
- They did not take part in the management of the company due to illness or some other good reason;
- They took all reasonable steps to stop the company incurring further debt
If you are making a claim against someone for insolvent trading or you are a company director being pursued for insolvent trading, you will require professional advice with respect to this complex area of the law.