Insolvency: A duty
Under s 588G of the Corporations Act 2001, directors of a company have a duty to prevent insolvent trading by a company. An entity is held to be insolvent if it is unable to pay its debts at the time when they become due and payable.
Signs of insolvency
In the case of ASIC v Plymin (2003), Justice Mandie in the Supreme Court of Victoria provided further qualification by identifying a number of factors or signs pointing toward the existence of an insolvent company. These included:
- 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;
- Solicitor’s letter, summons(es), judgements or warrants issued against the company;
- Payments to creditors of rounded sums, which are not reconcilable to specific invoices;
- Inability to produce timely and accurate financial information to display the company’s trading performance and financial position to make reliable forecasts.
Making a claim
A liquidator generally brings forward a claim on behalf of all the creditors of an insolvent company. Where a liquidator does not bring forward such a claim, creditors may have recourse to commence their own personal action upon the consent of the liquidator in order to recover their debt.
A breach of the duty under s 588G will often result in the director’s incurring further civil penalty provisions, including a pecuniary penalty of up to $200,000.
If you have any queries about insolvency, contact our commercial dispute lawyers today.