Among the many duties of a company director, you have a duty to avoid insolvent trading. The team at Snedden Hall & Gallop explain the need to understand your company’s financial position.
It is your duty, as a company director, to maintain a sound knowledge of the company’s finances and, in particular, to know whether the finances are in good shape. It is no defence to put your head in the sand and have the view that the finances are someone else’s responsibility.
What do the Courts say?
The Courts have made it abundantly clear that directors need to have turned their minds to, and have been satisfied of, the company’s financial position.
The Corporations Act 2001 (s588G), states that a director has a duty to prevent insolvent trading by a company. In this context, a company is held to be insolvent if it is unable to pay its debts at the time when they become due and payable or by making certain payments, the company would become insolvent.
A breach of the duty will often result in significant penalties or liability for the company’s debts (in full or part).
The tell-tale signs of impending insolvency
In the case of ASIC v Plymin (2003), Justice Mandie identified a number of factors or signs pointing toward the existence of an insolvent company. These factors have received continuing approval over the ensuing period. They include:
- Continuing losses;
- Liquidity ratio below 1;
- Overdue Commonwealth and state taxes;
- Poor relationship with present bank including inability to borrow further funds;
- No access to alternative finance;
- Inability to raise further equity capital;
- Suppliers placing the debtor on COD terms, or otherwise demanding special payment before resuming supply;
- Creditors unpaid outside trading terms;
- Issuing of post-dated cheques;
- Dishonoured cheques;
- Special arrangements with selected creditors;
- Solicitors’ letter, summons(es), judgements or warrants issued against the company;
- Payments to creditors of rounded sums, which are not reconcilable to specific invoices; and
- Inability to produce timely and accurate financial information to display the company’s trading performance and financial position to make reliable forecasts.
What do I do if I am concerned?
Let’s assume you can identify with one or more of these fourteen factors that point towards insolvency. It may seem overwhelming. What you cannot do, though, is nothing. Conversations with the other directors, the CEO, your company’s accountant and your lawyer should be the initial actions. Generally, you will need to consider what steps can be put in place to regain control of the company’s finances which could include appointing an external administrator.
Contact Snedden Hall & Gallop
If your company’s finances are troubling you, contact our Commercial Disputes team today. We can help you understand the steps you can take if you think your company is at risk of being made insolvent. We will also assist you in understanding your rights and obligations concerning insolvent trading. Please contact the team at Snedden Hall & Gallop today on (02) 6285 8000 or by email.