An Introduction to Insolvent Trading Video

Transcript of Video

Hi & welcome to the Insolvency Experts —“ I’m Steven Kugel

What we are going to talk about here is the concept of Insolvent Trading.

Of course, here we are not talking about people who are trading as Sole Traders or in a Partnership as in these types of trading situations, there is no structure except the individuals involved who are immediately personally liable for each and every debt they contract. In other words there is no protection whatsoever or no separation between personal assets and business risks.

What we will be talking about in this episode is the concept of someone who has taken the time and trouble of setting up and trading through a Pty Ltd company.

Company Protection

By trading through a company an individual has one level of protection they do not have as a sole trader or in a partnership. What I mean is that when a PTY LTD company contracts for supplies or services, it is the entity that is liable for the payment of that debt. Not the director. There is a separation at law where the company is considered an individual in the same way as a natural person is an individual.

So, if the company is unable to pay its debts, the creditor cannot ask another person to pay that debt — in this case, the creditor cannot ask a director personally to pay the debt of the company. In this way, there is separation between a director’s personal circumstance and his business risk.

So now we see a company provides a level of protection we also need to understand that protection of the company may be lost through certain behavior considered illegal and in breach of the Corporations Act. And if the law is broken in this way the loss of protection may give rise to claims against the director’s person assets. That is, if the director engages in certain behavior, in this case, Insolvent Trading, the Corporate Veil may be lifted and claims against personal assets may become possible.

So what is Insolvent Trading.

The definition of Insolvent Trading is — to incur credit from one’s trading partners at a time the director could not form the view that the company could repay the credit obtained as and when it fells due for payment.

Now, if a director engages in Insolvent Trading or the taking of credit at a time the director could not form the reasonable expectation that he could repay that debt as and when it fell due for payment, the law says that the director may be held personally liable for the damage caused to the company or its creditors. This means the corporate veil of protection may be lifted and a directo’s personal assets may be exposed to the claims of the company or its creditors