Due to the economic repercussions of COVID-19, insolvent trading has become an area of law that all those involved in business should understand. With the temporary relief on insolvent trading for directors scheduled to end on 31 December 2020, it is vital that businesses understand their obligations

What is insolvent trading?

A director has a duty to prevent insolvent trading. Insolvent trading occurs where:

(a)        a person is a director of a company at the time when the company incurs a debt; and

(b)        the company is insolvent at that time, or becomes insolvent by incurring that debt (or multiple debts); and

(c)        at that time, there are reasonable grounds for suspecting that the company is insolvent, or would become insolvent by incurring the debt(s).

Who can bring an insolvent trading claim?

  • ASIC (civil, criminal and director banning orders);
  • The liquidator; or
  • A third party to whom the liquidator has assigned their claim.

Who can insolvent trading proceedings be brought against?

  • Directors;
  • Defacto or shadow directors: these are people or companies who control the company or whose directions the directors of the company are accustom to acting, but are not officially appointed as a director; and
  • A parent company of the insolvent company - This applies if there were reasonable grounds to suspect that the subsidiary was insolvent at the time the debts were incurred.

Defences

Defences to an insolvent trading claim include:

  • At the time the debt was incurred, the director had reasonable grounds to suspect that the company was solvent.
  • Due to illness the director did not take part in the management of the company.
  • The director took all reasonable steps to prevent the company from incurring the debt.
  • The debt was incurred in connection with a “safe harbour” plan (a plan that is put in place to keep a company trading when its solvency is in question). This has various requirements and will be the subject of a further article.

Lessons

Insolvent trading claims are very serious and can have consequences in both criminal and civil law. You should always seek legal advice to ensure that you are acting in accordance with the law.

If you receive documentation accusing you of insolvent trading, you should seek expert legal advice immediately.

About the Author

Catherine Ballantyne

Special Counsel
A business disputes specialist, Catherine is a trusted advisor to businesses and individuals in obtaining successful outcomes. Businesses rely on Catherine as a trusted advisor as well as lawyer in guiding them through complex litigation and disputes.

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