It is important to recognise the signs of company insolvency as it is vital you act immediately to prevent trading whilst insolvent. Insolvent trading is governed under the Corporations Act and is when a company continues to trade even though the director recognises that it is insolvent or likely to become insolvent.
In order for a company director to be found guilty of insolvent trading, the prosecution must prove these factors:
- The company director was aware (or should have been aware) that the company was insolvent or likely to become insolvent at the time it incurred a debt.
- The director failed to take appropriate action to prevent the company from incurring the debt.
The purpose of this law is to establish a clear duty of care on directors as it is the responsibility of the director to always act in the best interest of the company.
There are serious consequences for company directors who have been found guilty of insolvent trading. These include:
- Civil penalties up to $200,000
- Compensation proceedings – This is when the court orders that the company director pays compensation to the value of the debts acquired whilst the company was insolvent. In this case, the company director will be found personally liable for the company debts.
- Criminal charges – The company director could become subject to a criminal prosecution if referred to the Director of Public Prosecution.
This is why it is crucial, that as the company director, you are able to recognise warning signs of company insolvency so you can avoid trading whilst insolvent and incurring potential civil and criminal penalties.
If you are concerned that your company is insolvent or likely to become insolvent, then please act immediately. Contact ISA to get FREE expert advice from a qualified insolvency consultant on our 24/7 hotline – 1800 003 883.