Being a Director of a struggling company can carry some very serious implications for the Directors if certain actions are not carried out.
An insolvent company is a company that is unable to pay its debt as and when they fall due, for example, they do not have enough cash to meet the company’s running expenses for payment on time. It is similar to that of a person who becomes bankrupt, at some point in time they do not have the assets or income to meet their liabilities.
How can I tell if my company is insolvent?
One of the main warning signs that your company could be insolvent is if you are:
- The company is having financial difficulty;
- The company is suffering from ongoing losses;
- The company has a poor cashflow;
- The company has difficulty in obtaining finance;
- The company has unpaid creditors outside of the creditor’s terms for payment; and
- The company does not have enough liquid assets to pay its creditors.
What do I do if my company becomes insolvent?
The most important thing that a director should do if they suspect that their company is insolvent is to seek financial and legal advice.
If a company continues to trade whilst they are insolvent and incur further liabilities then the director could be personally liable for the debts the company incurs whilst the company is insolvent.
Generally speaking, if your company is insolvent there are three outcomes. Firstly the directors can put the company under voluntary administration. This means that an independent person will take control of the company to try and save it, or if it not possible to save the company, they will liquidise the company in order to provide the best return to the company’s creditors.
The second outcome is that the company can go into liquidation or be wound-up. This process sees the appointment of an independent liquidator who will take control of the company so that the assets of the company can be sold and the proceeds being divided amongst the creditors.
Another possible outcome is that a secured creditor appoints a receiver who will collect and sell the secured assets of the company to repay the debt owed to the secured creditor.
What happens if my company continues to trade whilst insolvent, incurring further debt?
As a director of a company there are various duties that are imposed under the Corporations Act 2001 (Cth).
There are several consequences that can be imposed upon director’s who’s company has been trading whilst insolvent. The first of these are known as ‘Civil Penalties’. Civil penalties are in essence a fine but not under criminal law. This means that you will not receive a criminal conviction but will be required to pay a sum of money. These finds can be significant with the maximum penalty being $200,000.00. These issues are prosecuted by the Australian Securities and Investments Commission (ASIC).
In addition to Civil Penalties, proceedings can be commenced against directors personally for the payment of compensation for the losses suffered by creditors. There is no maximum liability for these claims and these are in addition to the Civil Penalties that a director may be ordered to pay.
A director can also face criminal charges where the director has been found to have acted dishonestly when trading whilst insolvent. These penalties can include a fine of up to $220,000 and imprisonment for up to five years.
With such severe consequences a possibility for directors of companies, it is crucial that financial advice be sought to ensure that a company remains solvent and does not slip into insolvency. If on the other hand you believe that your company is insolvent you should seek immediate legal advice about your options and to ensure that you do not expose yourself to liability.
If you require any legal advice on insolvent trading or the options available to you if you believe your company is insolvent, do not hesitate to call Lynn & Brown on 9375 3411.
About the authors:
This article has been co-authored by Aaron Plenderleith, lawyer, and Steven Brown, director at Lynn & Brown Lawyers. Aaron was recently admitted to practice law in Western Australia and specialises in legal writing, legal research, criminal law, commercial and estates. Steven is a Director and has over 18 years’ experience in legal practice and practices in commercial law, business law and estate planning.
