Many household name businesses have been forced to close their doors over the past 24 months. Most market segments but especially Retail and Construction are struggling to survive. For every business that closes, thousands remain open trying to survive.
It is hard for a business owner that has traded successfully for many years to admit that they are in trouble. Often they continue trading in the hopes that things will improve, thereby digging themselves further and further into a whole.
Company directors may be putting themselves at risk if they are in fact trading insolvent.
What is the meaning of “Trading Insolvent”
Trading insolvent means that you continue to run your business as normal, making purchases or credit and employing people while your business does not have the resources to pay its debts. It is no different to an individual being insolvent However in the case of a business, it is part of the responsibilities of a company director that they are not trading insolvent. To do so is a criminal offence under Australian law.
What are the Indicators of Business Insolvency?
If your cash flow is low and you have been accumulating debts that you are unable to pay then you probably already suspect the your business is in trouble. The following are some of the main tell-signs of busness insolvency
- Insufficient cash flow to meet obligations
- Escalating debt levels.
- Customers failing to make payments on time which is putting you further behind
- Debt collectors are calling regularly
- Superannuation and Tax obligations are unlikely to be met as required by law
Consequences of Trading Insolvent
Section 588G of the Australian Corporations Act allows for the imposition penalties on any director that allows their business to continue incurring financial obligations while knowing that the company may not have sufficient funds to pay fully for these obligations. The director does not necessarily need to do so deliberately, however pleading ignorance does not offer dispensation from legal obligations of a director.
What should you do?
Your business may have been affected by a single large transaction going wrong. There may be opportunity to have access to some short term finance or negotiate a consolidation deal with creditors where you are given some extra time to pay them back.
No creditor wants to sue or to have to take their time and money to liquidate your business. However if you stand by and do nothing this may actually happen. The other and more significant concern is that if you are found to be a director of a company that is trading insolvent you risk to incur the penalty of jail time as well as a distinct possibility of losing your home as part of company liquidation proceedings.