Is It Illegal To Trade While Insolvent In Australia?

Besides providing goods and services, companies must pay their debts when they are due. If not, the company is deemed insolvent. According to Australian law, it’s illegal for a company to trade while insolvent. 

If found guilty of trading insolvent, the company’s director/s may face charges with dire consequences, including serving jail time. It’s important to understand how to act when your company faces bankruptcy and insolvency issues. Consulting with a legal expert will help you navigate the situation best and be aware of your legal obligations. 

This article explores the laws surrounding trading while insolvent in Australia. Keep reading to discover the consequences of insolvent trading and how to defend/protect your company from insolvency claims.  

What Is Insolvent Trading? 

The Corporations Act 2001 provides the meaning of insolvency. According to section 95A of the act, a solvent company is a company that’s able to pay all its debts when they are due and payable. If that’s not the case, the company is insolvent. 

So, if a company is insolvent, it can’t pay its debts when they are due and payable. According to the Corporations Act 2001, a company is also deemed insolvent if it proposes a restructuring plan to its creditors. 

Insolvent trading occurs when a company is unable to repay its debts and continues conducting business and incurring more debts.

The Director’s Duty To Prevent Insolvent Trading: The Corporations Act 

Who is liable for insolvent trading? Section 588G outlines that the duty to prevent insolvent trading falls on the shoulders of the company’s director. This section applies if the director was in charge when the company incurred the debt while insolvent. Or if it became insolvent by incurring the debt when the director was in charge.

The company’s director is guilty of insolvent trading if they don’t prevent the company from acquiring new debt while insolvent. Or when there’s reasonable doubt that the company is solvent, yet the director proceeds to incur a new debt. 

The charges may also fall on a reasonable person assuming a similar position and who’s expected to know the company’s financial situation. 

Consequences Of Trading While Insolvent in Australia 

It is illegal for a company to trade while insolvent in Australia. If the company’s director is found guilty of this offence, they might face various consequences. These include personal liabilities, civil penalties, and criminal charges. 

  • Civil penalties: A director may be liable to pay a civil penalty of up to $200,000 if found guilty of allowing the company to trade while insolvent. 
  • Criminal charges: If the director was found guilty of acting dishonestly, the criminal charges may include a sentence of up to five years, a fine of up to 2,000 penalty units, or both.
  • Personal liabilities: A liquidator, creditor, or the Australian Securities and Investments Commission (ASIC) may initiate compensation proceedings against the director to seek compensation for the loss/damage. As a result, the director could receive a compensation order to pay the creditors for the losses or damages they incurred.  

There’s no limit to the compensation payments a director might be required to repay the creditors. In some cases, the director may declare bankruptcy due to the consequences of trading insolvency. If this happens, the director may be disqualified from serving as a director/managing a company for up to five years. 

What Are The Defences To An Insolvent Trading Claim? 

If you’re a company’s director facing charges for trading while insolvent, you should seek assistance from a skilled commercial lawyer. An expert can help you identify the possible defences to prevent harsh legal consequences. These defences include: 

  • As a director, you didn’t take part in the company’s management due to illness or other good reasons.
  • A competent and reliable person(s) in the company had relayed information supporting the company was solvent when the debts were incurred.
  • There was reason to believe the company was solvent.
  • You (the director) took all the necessary steps to prevent your company from incurring debt.

What Should You Do If Your Company Is Insolvent? 

If you’ve got reasons to believe that your company is insolvent, you must ensure that the company doesn’t take on any more debt. Seek professional legal and financial advice on the best steps for you and your company.

Some options include restructuring your company or seeking funding for recapitalisation. You can also opt for voluntary administration. This strategy involves appointing an independent administrator to control the company and create a plan to make the company solvent. 

As the last option, you can wind up the company, sell the assets, and use the funds to repay the creditors. A liquidator usually helps with the liquidation process of a company. 

Dealing With Insolvency In Australia

Realising your company is insolvent or about to be insolvent can be stressful. You can save the company from filing bankruptcy and winding up by consulting bankruptcy and insolvency experts early in the process.

Our law firm specialises in helping businesses going through insolvency issues. We’ve got expert legal advisors ready to advise you and help your company get back on track. To speak to one of our specialist insolvency lawyers, call us at 1300 234 886 or fill out our contact form

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Disclaimer: The information provided in this article is for general informational purposes only and should not be construed as legal advice. Consult with a qualified commercial lawyer for personalised advice regarding your specific situation.