What is Insolvent Trading?
The Corporations Act section 588G states that it is an offence for a Director to allow a company to trade while it is insolvent, or to incur a new debt when the company is is unable to cover its payment, and that the Director may be personally liable for any new debts that are incurred.

What can result from trading when insolvent?
A Director who allows an insolvent company to incur a new debt, which may leave the debt unpaid in the event that the company is wound up or liquidated, may face a claim for personal compensation. And the liability does not go away quickly; liquidators have up to six years after the date of the liquidation’s commencement to make insolvent trading claims against directors.

Is Insolvent Trading a statutory offence?

Section 588G of the Corporations Act sets out a Director’s duty to prevent insolvent trading by a company. Insolvent trading may be considered an offence and referred to the ASIC for further investigation and possible prosecution. Directors are best advised to deal with such matters by seeking professional advice.

Who can make Insolvent Trading claims?
The liquidator has the first right to make claims for debts owed to all creditors. Even if the liquidator chooses not to take action, individual creditors or groups of creditors may start their own actions, although are limited to claiming for their own debts only.

Who is deemed to be a Director?
Directors include not only those people who are appointed directors, but also people who act as directors, even if they are not formally appointed. Shadow or de facto directors, and even other parties in control of the company at the relevant time, may be exposed to an insolvent trading claim. The “other parties” definition does not include people who give advice as part of their normal professional role, including accountants, managers and other paid consultants.

Is there a difference between “incurred” and “accrued” debts?

The distinction is that the insolvent trading debt must be incurred, not just accrued, at the time when the company was insolvent. An incurred debt involves the creation of a new debt that did not previously exist and is liable for claims. Accrued debts will not form part of an insolvent trading claim as they usually relate to ongoing contractual agreements, provided that the original agreement was entered into when the company was solvent. For example, lease payments that become due from time to time under a contract entered into prior to the insolvency, will not form part of an insolvent trading claim.

What defences are available to Directors?

The Corporations Act provides some statutory defences to directors. For example, a director may not be liable for an insolvent trading claim when there were reasonable grounds to expect (not just suspect) that the company was solvent, or where a good reason existed for not taking part in the management of the company at the relevant time, or where the director took all reasonable steps to stop the company from incurring the debt. If you are facing a claim and are in a position where you believe you have grounds a defence, you should seek professional advice.

Can creditors take action for Insolvent Trading?
Even when a liquidator does not or cannot make a claim, creditors of the company can make a claim themselves. Creditors may apply to the liquidator for consent six months after the liquidation and may commence an action at any time with the written consent of the liquidator. Nevertheless, unlike liquidators, creditors cannot group all debts into their claim and can only take actions for their own debt. The Corporations Act may in some circumstances prevent the creditor from taking action, for example where the liquidator has begun proceedings or has intervened in an application for a civil penalty order.

How long do liquidators have to take an Insolvent Trading action?
The Act allows liquidators six years from the beginning of the liquidation to commence an action for insolvent trading. The liquidator must commence proceedings within that six year period although it is not sufficient to merely issue a demand.

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