Are you going to be personally responsible for your company’s debts?

Are you going to be personally responsible for your company's debts? We explain how to make sure you are protected.

The personal consequences of insolvency for directors continue to deepen – we can help ensure that you’re protected. Set out below are some indicators of when you should be taking advice on your potential exposures.

Duty to Prevent Insolvent Trading

Directors have a duty to prevent insolvent trading under Section 588G of the Corporations Act 2001 (Cth) (the ‘Act‘). But just what is ‘insolvent trading’, and how can you tell whether your company is insolvent?

Section 95A of the Act defines ‘solvency’ and ‘insolvency’. You are ‘solvent’ if, and only if, you are able to pay all your debts, as and when they become due and payable. If you are not solvent, then you are ‘insolvent’.

Indicia of Insolvent Trading

The definition in Section 95A  is not particularly helpful for businesses to assess whether they are insolvent (or solvent) in a practical sense. However, in the case of ASIC v Plymin (2003) 46 ACSR 126, the Court discussed practical indicators that point towards a company being insolvent that provide some practical guidance for directors. These factors are where the company has:

  • Overdue Commonwealth and/or State taxes
  • Poor relationship with present bank, including inability to borrow further funds
  • No access to alternate finance
  • Inability to raise further equity capital
  • Continuing losses
  • Liquidity ratios below ‘1’
  • Suppliers placing company on cash on delivery (or COD) or otherwise demanding special payments before resuming supply
  • Creditors unpaid outside trading terms
  • Issuing of post dated cheques
  • Dishonoured cheques
  • Special arrangements with selected creditors
  • Solicitors’ letters, summonses, judgements or warrants issued against the company
  • Payments to creditors or rounded sums which are not reconcilable to specific invoices, and
  • An inability to produce timely and accurate financial information to display the company’s trading performance and financial position and make reliable forecasts.

When questioning whether the company is insolvent or solvent, directors should consider the factors above, and seek our legal advice on 1300 654 590 or email us.

The information contained in this post is current at the date of editing – 19 July 2023.

Our Great Lawyer Guarantee

We want to be part of your team over the long term. We'll achieve this by sticking closely to the following principles:

  • We'll listen carefully to understand what you want to achieve. Then we'll thoroughly explain our advice and step you through the documents. You can be sure you'll know the full consequences.
  • Our lawyers work as a team, so someone will always be available to answer your questions, or point you in the right direction. You will also benefit from a range of perspectives and experience.
  • One of our key goals is to pass on as much knowledge as we can, so you can make your own informed decisions. We want to make you truly independent.
  • We only do what we're good at. You can be confident that we know what we're doing and won't pass on the cost of our learning.
  • For advice and documents, we provide a fixed or capped quote so you don’t take price risk. If you're in a dispute, we'll map out the process and costs so you know what to expect.
  • We're not in this game for our egos. We're in it for a front row seat to witness your success.

We measure our success on how efficiently we have facilitated your objectives, enhanced your relationships, and reduced the level of stress for all involved.

If we sound like people you can work with, call us now on 1300 654 590 and speak directly with a great lawyer.

What is a director’s role in a members’ voluntary liquidation?

What is a director’s role in a members’ voluntary liquidation?

If you are a director and member of a company and ready to shut down your solvent business through a members’ voluntary liquidation, you may be wondering how the process looks. In particular, you may be wondering what your role will be as the liquidation progresses.

Read more below to see how you may stay involved with the company throughout the liquidation process and how your role might change if you opt out.

read more