What does the law say?
There are a lot of legal provisions that a director needs to consider in a situation where their company is possibly insolvent. We have provided below some of the relevant sections of the Corporations Act and other director’s duties that are developed through case law and the Tax Act. But this is a very complicated area of the law so after you’ve had a read of the information below we strongly recommend that you call us for specific advice.
Section 95 (A) (1) Insolvency Definition
The section defines insolvency as simply the inability to pay debts as and when they fall due. However, the reality is much more complicated than that. There is a mountain of case law on the topic and no director can be expected to be on top of all of that. We suggest you have a look at our page where we summarise the case law into a series of easy questions.
Section 588G Insolvent Trading
A director may incur civil and criminal liability for debts incurred during trading when there are reasonable grounds for suspecting that the company is, or may become, insolvent. We have explained this concept in more detail at Insolvent Trading.
Section 60 Definition of director
An adviser to a company may be defined as a director. Whilst it is the duty of a director to prevent a company from trading whilst insolvent, the definition of director may be extended to advisers. Anyone who instructs or directs the directors on a day-to-day basis may be defined as being actively involved in the direction of the corporation and may incur a personal liability for the company’s debts. This possibly may extend to bankers if they are actively involved in rehabilitating a company. Care should be taken by lenders and advisors not to involve themselves in director’s decisions.