Insolvent Trading Imposes Stringent Liabilities on Directors
The current financial crisis has placed heaps of businesses around the world as well as their directors in a precarious position. Their companies are going under. Under Australian law, a company is insolvent when it is unable to pay its debts when they are due. Sometimes things have got so bad that creditors don’t want to compromise and allow for a payment arrangement. In instances like these, many Aussie companies believe that they can trade themselves out of these bad situations.
It is the duty of the director to be able to identify when a company is insolvent. According to the Corporations Act 2001 in Australia, a director has a positive duty to prevent insolvent trading and will be assessed to see whether they have breached their duty to prevent it. The Act requires the director to prevent the company from incurring debt if the company is insolvent or even suspecting that the company is insolvent. It is advised to consult the services of a professional Restructuring specialist because there are defences available to directors against whom an insolvent trading action has been brought, .and these specialists are up to date with the most current correction strategies.
Incurring Debts which Cannot be Paid
If the company continues trading while it is insolvent, the directors may become personally liable to contribute to the company’s assets. The director needs to find out what has lead to insolvency in the first place and whether it is because of poor financial management. Many times the director has continued to trade and incur further losses even when they knew that the business would never be able to pay for its liabilities. When a business is in this kind of difficulty, the directors needs to consider all options to keep the business afloat as opposed to resigning in an attempt to escape trouble. Whatever choices are made, it needs to be documented for the liquidator to take the appropriate action against the director.
When the Director Hasn’t Guarded the Company’s Assets
Australia doesn’t take insolvent trading lightly, and has in fact got some of the most punitive laws than anywhere else. A director who has been dishonest with allowing a company to trade while insolvent can face massive penalties which include things like civil penalties and even criminal charges. The director may also be disqualified from managing a company for a certain period of time and can also face imprisonment for up to five years.
The Australian Securities and Investment Commission (ASIC) can also lay a civil compensation claim on behalf of creditors. They have laid out a few principles which directors need to follow in Australia if they want to steer clear of a breach of duty. The director must –
- keep accurate financial records
- monitor the financial position of the company
- hold regular board meetings to get updates on the company’s financial status
- always be alert to pressure from creditors
- stop trading and start insolvency proceedings before the creditors do so
- understand the cash flow requirements of the company
- research all the different options in order to deal with financial problems
- make sure no new debt is incurred
- exercise speedy action to get help and advice from professional and accredited financial advisors
The ASIC requires that directors become deeply involved with the company’s financial affairs once there is a hint that the company is battling with paying debs. It is important for the director to seek professional advice regarding insolvency, more so because some directors inadvertently enter into transactions in innocence, but in instances like this, ignorance is not bliss. The director will still be challenged by the liquidator. However there is hope, and a court may well relieve the director from liability if it really does appear that the director has at all times acted honestly.
You can Turn Your Dismal Situation Around
If a director suspects that the company is incurring debt, it is critical for the director to take all the necessary steps to prevent insolvent trading and incurring any further debt. Such steps will include letting the other directors know and most importantly obtaining professional advice. Restructuring Works are specialists when it comes to assisting companies in financial distress. They offer reputable and trustworthy advice which will lead to a solution and lead a company out of a dark pit and into the shining light. The menu they provide is full of topics that directors want answers about and they provide free detailed information and free call-back on penalties-, laws, breaches and defences to Insolvent Trading actions and much more. Call them and allow the load on your shoulder to miraculously disappear.