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Is Your Company Insolvent or in debt?
Generally speaking, your obligation as a company director is to ensure that the company complies with general and specific laws which apply to your company and its operations. It is also your primary duty to act in the best interests of the company’s shareholders and maximise shareholder wealth.
The Corporation Act imposes the following statutory duties on directors and officers of companies:
|Section 180||Duty to exercise their powers and discharge their duties with the degree of care and diligence that a ‘reasonable’ person would exercise|
|Section 181||Duty to exercise their powers and discharge their duties in good faith in the best interests of the company and for a proper purpose|
|Section 182||Duty not to improperly use their position to gain an advantage for themselves or someone else or cause detriment to the company|
|Section 183||Duty not to improperly use the information available to them as a result of their position to gain an advantage for themselves or someone else, or cause detriment to the company|
Section 184 of the Corporations Act also imposes penalties relating to criminal offences in relation to the above duties.
In addition to the above, in the event your company is insolvent, or there is a risk of insolvency, your duties extend to the company’s various other stakeholders, such as the company’s creditors and employees. Section 588G of the Corporations Act imposes a duty on a director to prevent insolvent trading by a company.
Insolvent trading is when a director allows the company to continue to trade its business and incur debts at a time it is insolvent.
In circumstances where it is determined that a director has traded the company whilst insolvent and breached Section 588G of the Corporations Act, a director may be held personally liable for the debts incurred by a company.
There are various penalties and consequences of insolvent trading, which include:
- Civil penalties (including pecuniary penalties up to $200,000). The ASIC may also consider disqualifying a director from managing companies in circumstances where they have been associated with two (2) or more failed companies where a dividend of less than fifty (50) cents in the dollar has been declared;
- Either the ASIC or a Liquidator can commence proceedings against a director personally and seek compensation for loss resulting from insolvent trading;
- Criminal proceedings may also be brought against a director by the ASIC for insolvent trading in circumstances where it is proved that a director has acted in a dishonest manner or intentionally traded the business of the company in a reckless manner.
- If a director is found guilty of a criminal offence under Section 588G, of the Corporations Act they may be fined up to $220,000 or face imprisonment for up to five (5) years, or both. This will also lead to a director being disqualified from managing companies.
Are you or your company insolvent?
Where a company is showing signs of insolvency it is appropriate to take immediate action to preserve the position of the company and to avoid any personal liability for a director in continuing to trade the company. The directors of a company can place it into Voluntary Administration which provides time for an Administrator to investigate the affairs of the company and assess its solvency position. A Voluntary Administration also allows for the possibility of a company to continue in the future, usually by way of a Deed of Company Arrangement being accepted by creditors.
Should it be determined by the directors that the company is insolvent and not in a position to continue its going concern obligations, then it may be appropriate to place the company into Creditors Voluntary Liquidation.