Director’s Duties & Insolvent Trading

What are the consequences of Trading whilst insolvent?

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:

  1. The company incurred a debt whilst it was insolvent;
  2. The director was aware, or should have been aware, that the company was insolvent at the time; and
  3. 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:

  1. Civil penalties up to $200,000;
  2. 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;
  3. 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.

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