As a director of an Australian company, it is your responsibility to ensure that the company remains solvent and can meet its financial obligations.

Insolvent trading happens when a company incurs a debt while it is insolvent or becomes insolvent by incurring that debt. Insolvency happens when a company is unable to pay its debts as they fall due. To prevent insolvent trading, directors must be aware of the company’s financial position at all times and take steps to ensure that the company remains solvent.

Directors should regularly review the company’s financial statements, cash flow projections, and budgets to identify any potential financial issues. If a director suspects that the company may be insolvent, they must take immediate action to seek professional advice and develop a plan to address the company’s financial issues. This may include restructuring the company’s operations, negotiating with creditors, or placing the company into voluntary administration.

In addition to seeking professional advice, directors should also take the following steps if they suspect that the company may be insolvent:

  1. Conduct a thorough review of the company’s financial position, including cash flow projections, budgets, and debtors and creditors.
  2. Consider whether the company has any viable options for restructuring its operations to improve its financial position.
  3. Develop a plan to address the company’s financial issues, including negotiating with creditors or seeking additional funding.
  4. If the company is unable to meet its financial obligations, consider placing the company into voluntary administration.
  5. Seek legal advice to understand the director’s duties and obligations regarding insolvent trading.

If a director fails to take appropriate action to prevent insolvent trading, they may be held personally liable for any debts incurred by the company while it was insolvent. This can include fines, disqualification from managing a company, and even imprisonment in severe cases.

In conclusion, directors must take a proactive approach to managing the company’s financial affairs and seek professional advice whenever necessary to prevent insolvent trading. By doing so, directors can ensure that the company remains solvent and can continue to operate effectively for the benefit of its stakeholders.

How we can help

We have helped many clients navigate their way through this process. As your accountant we can help you right from the very start to identify if the company is insolvent and provide you with the right steps to move forward.