What is insolvency?
Insolvent trading, as defined by the Corporations Act section 588G, pertains to situations where a company is unable to pay its debts as they become due and payable. Under this provision, if a director allows the company to incur new debts while aware of its insolvency, they may be held personally liable for those debts. This legal framework imposes upon directors the responsibility of ensuring that their company refrains from trading while insolvent.
How is company insolvency specifically defined?
The precise definition of company insolvency is outlined in Section 95A of the Corporations Act. According to this provision, solvency and insolvency are determined as follows: A person, which includes a company, is deemed solvent only if they possess the ability to pay all their debts promptly as they become due and payable. Conversely, a person who lacks this capacity is considered insolvent.
In practical terms, this implies that if a company were to assess all its outstanding debts or invoices currently due and payable, and it would be unable to settle them in full at the present time, it would be classified as insolvent.
What does personal liability entail?
A director may incur personal liability for debts accrued after the company’s insolvency onset. It’s important to note that a director cannot be held personally liable for debts accrued while the company was solvent, even if they remain unpaid due to subsequent insolvency.
To ascertain insolvent trading, a liquidator conducts a thorough examination of the company’s financial records and determines the date of initial insolvency. Any debts incurred post this date are subject to inclusion in an insolvent trading claim against the directors.
How would I know if my company is insolvent?
Determining whether your company is insolvent relies on the definition provided earlier: if the company cannot settle all its debts as they become due, it is deemed insolvent.
Assessing your company’s financial standing objectively, particularly while it continues to operate, can be challenging.
It’s not unusual for a company facing difficulties to experience occasional periods of insolvency. However, the critical issue arises when a company remains insolvent without the prospect of recovery.
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During such trying circumstances, navigating the next steps can be daunting, especially when your company faces financial hardship.
Acting swiftly is crucial in order to potentially avoid liquidation, administration, being served a DPN. or facing many other stressful outcomes. So, our invaluable guidance in comprehending your company’s available options immediately.