Many directors we speak to are unaware of the insolvent trading provisions in the Corporations Act…let alone the potential civil and criminal penalties they can be exposed to.
Kleenmaid Liquidation
Insolvent trading is in the spotlight due to the recent conviction of Bradley Young, a former director of one of the Kleenmaid group of companies (a national whitegoods distributor). Mr Young was sentenced to nine years imprisonment (nine years for fraud and three and a half years for insolvent trading charges). Further details of this case can be found here.
Director’s Duty to Prevent Insolvent Trading
The Corporations Act provides that a director has a positive duty to prevent a company from trading whilst it is insolvent. A company is considered insolvent if it cannot pay its debts as and when they are due and payable.
The Australian Securities & Investments Commission (‘ASIC’) website contains information for directors which may be of assistance. For more information, click here.
Penalties for Insolvent Trading
The penalties that can be imposed on a director for insolvent trading include:
- Civil penalties – up to $200,000.
- Compensation proceedings for amounts lost by creditors. Compensation payments are potentially unlimited. Proceedings can be taken against a director by ASIC, a liquidator or a creditor.
- Criminal charges – can lead to a fine of up to $220,000 or imprisonment for up to 5 years, or both.
Defences Available
There are defences available to insolvent trading, including:
- There were reasonable grounds to expect the company was solvent;
- A competent and reliable person provided information to support the company was solvent;
- Because of illness or for some other good reason, the director did not take part in the management of the company;
- The director took all reasonable steps to prevent the company from incurring the debt.
What are the Warning Signs?
There are a number of potential warning signs for insolvency, which can vary depending upon the nature of the business, industry, etc. Some of the potential warning signs include:
- Continuing losses experienced
- Cash shortages and poor cash flow
- Deficiency of assets compared to debts
- Overdue taxes
- Creditor repayment plans (eg ATO)
- Creditor demands and pressure (Debt collectors, legal demands, court proceedings, Statutory Demands, ATO Director Penalty Notices – DPNs)
- Dishonoured payments and direct debits
- Poor relationship with present bank, including inability to borrow further funds
- No access to alternative finance
- Inability to raise further capital
- Suppliers changing terms to Cash on Delivery (‘COD’), or otherwise demanding special payment arrangements before resuming supply
- Creditors remaining unpaid outside normal / industry trading terms
- Reverting to use of post-dated cheques to ‘trade out of a difficult patch’
Steps to Take
If you suspect your client may be insolvent, it is imperative that you obtain advice from a suitably qualified professional. Being proactive can minimise the potential risk of an insolvent trading claim and also help protect your company and personal assets.
For more information on corporate insolvency, please contact our experts, or call us on 1800 246 801 for more information.
Article written by Jason Cronan, Director, Queensland