The Corporations Act imposes a clear duty of care on directors not to ‘prevent a company from trading if it is insolvent’ as the consequences can be disastrous if the company later fails.
A company director can be found guilty of insolvent trading if it can be proven that:
- The company incurred a debt whilst it was insolvent;
- The director was aware, or should have been aware, that the company was insolvent at the time; and
- The director failed to prevent the company from incurring the debt.
If the court finds a company director guilty of incurring debt whilst insolvent, they can become subject to penalties including:
- Civil penalties up to $200,000;
- Compensation proceedings – the company director could become personally liable, by order of the court, for a compensation payment to the value of debts incurred whilst the company was insolvent;
- Criminal charges – the company director could be referred to the Director of Public Prosecutions and become subject to a criminal prosecution.
If you are faced with these risks or possible risks, you should seek independent advice from a suitably qualified insolvency accountant like those at ISA. To find out how we can help you, contact us today on our 24/7 hotline on 1800 003 883.