Directors and insolvent Trading

A lot has been talked and written about regarding the liability of directors for insolvent trading. Members should be well aware of the risks for directors of companies that pass into liquidation.

Recently a judgement has been handed down in the Supreme Court of South Australia making the directors of a company liable pursuant to Section 588G of the Corporations Law for debts incurred whilst the company was insolvent (Insolvent Trading). The judgement reinforced many of the existing and known principles of the relevant law, however it also highlighted a number of other key matters that I will refer to below:

• Penalties for the late payment of debts to government agencies and similar are treated as debts incurred by the directors of insolvent companies
• Solvency is tested by the ability of a company to pay its debts as they fall due
• Directors can not rely on the goodwill of creditors who indulge extended repayment terms to the company. If the company is relying on these indulgences from suppliers then the company is more than likely insolvent
• Companies that are part paying accounts or issuing post dated cheques to suppliers are leaving clear signs behind that they are insolvent

An insolvent trading claim can only be brought against the directors of a company in liquidation. If companies are in financial difficulties there is an alternative to liquidation and that is Voluntary Administration (VA). However the end decision in a VA remains with the creditors.

Macks Advisory is a firm that practices exclusively in the areas of insolvency and business reconstruction and members with queries are invited to contact Peter Macks at Macks Advisory on 08 8231 3323 or by pmacks@macksadvisory.com.au.