Australian businesses have significant responsibilities. One of the main aspects of this is financial management, which involves serious risks if a director engages in insolvent trading.
You may have heard this term, be loosely aware, or have a strong understanding. But it’s good business practice to have a thorough knowledge of this debt-based issue, plus the potential legal ramifications of trading while in debt.
What is insolvent trading? Explore this guide to learn more, or contact our expert legal team immediately for a free consultation. At Corporate Lifeline, we’ve helped hundreds of businesses overcome legal hurdles and return to regular trading.
Insolvent Trading: The Basics
A good starting question—what is insolvent trading in Australian law? Fundamentally, it’s when a company incurs debts while being unable to pay existing debts. Under Australian law, this is outlined in the Corporations Act 2001 (Cth) in section 588G.
The Act explains directors have a duty of care to prevent trading while insolvent. As such, you must avoid this.
What happens if a company is trading insolvent? Legal consequences of failing to do so can be severe. Australian businesses are monitored by the Australian Securities and Investments Commission (ASIC). This organisation enforces insolvent trading laws and if you’re in breach of them, you may face:
- Fines of up to $1.1 million
- Compensation proceedings by liquidators
- Criminal charges and potential imprisonment
- Disqualification from managing companies
As such, it’s critical to know the warning signs of insolvency and to act immediately if you believe your company is facing financial distress.
How to Identify Signs of Insolvent Trading
You must remain aware of warning signs and act accordingly. As a director, be aware of:
- Ongoing losses in finances
- Negative cash flow
- Difficulty paying debts (either on time or late)
- Creditors requesting payments
- Dishonoured payments
- Bouncing payments
- Legal action from creditors
If you are aware of one or more of these actions, you should seek immediate professional advice. Remember, this is nothing to be ashamed of and shouldn’t prevent you from seeking advice.
In fact, the sooner you act, the sooner you can get your business back on track. Acting is also essential because it can protect your interests as a director.
How to Protect Your Professional Reputation
As a director, mitigating the risks of insolvent trading is important. To do this, you can:
- Maintain accurate financial records by keeping them up-to-date. You should also regularly review them.
- Monitor cash flow to assess business health.
- Act promptly at the first signs of financial distress and seek professional advice.
- Consider Safe Harbour provisions. As a director, this may protect you from significant legal repercussions.
On the latter point, Safe Harbour provisions (introduced in 2017) may help you avoid liability. It’s possible to restructure a company and save struggling businesses.
The Importance of Legal Advice for Insolvent Trading
Many directors put off contacting professional support due to feelings of embarrassment and shame. However, this should not prevent you from requesting the advice you deserve.
Many Australian businesses have faced insolvent trading. It’s possible to address the issue from large to small organisations and then return to regular trading. However, the crucial step is to address the issue as soon as possible—acting fast is good business practice and may lead to a positive resolution on the matter.
Directors concerned about professional services’ fees should be aware that Corporate Lifeline offers a free initial consultation. We will review your circumstances and provide transparent feedback, after which you can decide whether to proceed with our professional support.
Prevent Insolvent Trading! Corporate Lifeline Can Help
Don’t let insolvency ruin your trading history and professional standing. Act now to get your business back on track. Corporate Lifeline offers judgment-free assessments. Contact us today and we’ll offer you support and understanding.
What is Considered Insolvent Trading?
It’s when a company continues trading even though it cannot pay debts. It’s a serious offence under Australian law.
Can You Still Trade if You Are Insolvent?
No. It is illegal to continue trading if a company is insolvent. If found guilty of this, a director may face severe legal consequences.
What is the Penalty for Insolvent Trading in Australia?
Penalties can range from fines of $200,000 to $1.1 million. Criminal charges may also be pursued against the director, which may result in significant prison time. The professional damage this causes would be considerable and prevent an affected director from holding similar positions again.
What is an Example of Insolvent Trading?
An example is if a company is insolvent for seven months and continues to incur debts before a liquidation date. In this situation, a liquidator may be able to pursue a claim against the company.
