What is an insolvent trading claim?

An insolvent trading claim is an action for breach of a director’s duties. It is a cause of action that liquidators have against company directors after a company is placed in liquidation to compensate creditors. Sometimes people talk about a director being liable for trading while insolvent.

Can you trade when insolvent?

Trading whilst insolvent is a legal term used to describe a business which continues trading despite being insolvent. It can lead to a breach of several provisions of the Insolvency Act 1986 (including wrongful trading), therefore it is important to take care and know the risks if your business is struggling.

What are the penalties for insolvent trading?

The penalties that can be imposed on a director for insolvent trading include:

• Civil penalties – up to $200,000.
• Compensation proceedings for amounts lost by creditors. Compensation payments are potentially unlimited.
• Criminal charges – can lead to a fine of up to $220,000 or imprisonment for up to 5 years, or both.

How do you prove insolvent trading?

While the task of proving ‘insolvent trading’ is difficult, the easiest way is to establish that the company had no accounting records. The usual way to prove this is by admission (they could be genuinely lost or mistakenly destroyed). So it is really important to be careful making admissions to a liquidator.

Who can bring an action for insolvent trading?

A liquidator has six years from the beginning of the liquidation to commence an action for insolvent trading.

Is there an obligation to cease trading when a company is insolvent?

In insolvency, directors have a legal obligation to cease trading in accordance with insolvency laws and to ensure they do not breach directors’ duties. Failing to do so, can have significant consequences for the directors personally.

Is insolvent trading a criminal offence?

Insolvent trading is a criminal offence, and if found guilty, directors may encounter a fine of up to $220,000.00 or imprisonment for up to five (5) years. In addition to possible criminal charges, directors who are found guilty may also face disqualification.

Who is liable for insolvent trading?

WHAT IS INSOLVENT TRADING? Insolvent trading is the law under the Corporations Act section 588G that says that if a company is insolvent and a director allows the company to incur a new debt, then the director can be personally liable for the new debts incurred.

Why is insolvent trading illegal?

Insolvent Trading is Illegal. If a director allows a new debt to be incurred knowing the company is insolvent and unable to pay those debts as and when they fall due for payment , the director may be guilty of insolvent trading.

How do you mitigate insolvency risk?

How Companies Reduce Insolvency Risk

1. Focus on cash flow.
2. Reduce business expenses.
3. Keep your creditors in the loop.
4. Get good financial and legal advice.

How can a company recover from insolvency?

5 Ways Businesses Can Recover From Bankruptcy

1. Address the causes. When you find your business in this challenging situation, try to identify the cause.
2. Identify your goals.
3. Get a new credit card issuer.
4. Check your credit score.
5. Gradually re-establish the business credit.