Over the past 18 months, the surge in external administrations and heightened media attention on business insolvencies has turned the spotlight squarely onto ‘insolvent trading’. But while the term echoes in boardrooms and headlines, not everyone understands its nuances. Enter Ramsden Lawyers, ready to shed light on this complex subject.

Insolvent Trading Breaking News

In recent news, a company behind failed Couran Cove Island Resort South Stradbroke Operations is rumoured to have traded insolvent’ for almost 2 years, with net losses escalating until its final period of trading, the liquidator has claimed. South Stradbroke’s liquidation commenced on 23 May 2023, with a debt sheet over $1.6 million owed to creditors, staff and the Australian Taxation Office.

As residents began to flee Couran Cove back in February 2023, it appears that the cumulative effect of a lack of funding, ongoing litigation and various body corporate disputes off the back of the Covid-19 Pandemic, ultimately contributed towards the company’s demise, as reported by the Gold Coast Bulletin.

Breaking Down the Basics

Voluntary administration, corporate insolvency, company liquidation, and receivership – each term brings a weight of legal implications. But let’s first dissect what exactly ‘insolvent trading’ means.

According to Section 588G of the Corporations Act 2001, a company dives into the deep end of insolvency when it’s unable to foot its bills as they fall due. So, if a business persists in its operations and accumulates debts, it’s wading in the treacherous waters of insolvent trading. Directors, take heed! Failing to prevent a company from trading whilst insolvent might see you on the hook personally – from settling the debts from your pocket to facing criminal charges.

Is Your Company Solvent? Let’s Test!

Identifying insolvency isn’t as straightforward as tallying up assets and liabilities, especially in the construction industry, where there may be extended shortfalls pending payment of invoices rendered. Therefore, while the balance sheet might show more debts than assets, there’s another layer to the test: enter the ‘cash flow test’. This analysis peers into a company’s liquidity and business viability, evaluating its prowess to clear debts as they come or to convert assets into cash promptly.

Red Flags: Is Your Company Sailing Towards Insolvent Trading?

• Mounting tax and superannuation debts
• Persistent losses
• A stuttering cash flow
• Scattered financial documentation
• A glaring absence of cash-flow projections
• Troubles in recovering debts
• Out-of-pattern creditor payments
• Legal notices and financial penalties
• Suppliers demanding cash upon delivery
• Compromising arrangements with specific creditors
• Banking woes: breached overdrafts or loan defaults
• Strained ties with financial partners

For a claim of insolvent trading to stick, one must prove:

1. The individual was a director when the debt was incurred;
2. The company was, or became, insolvent due to that debt; or
3. There were a number of indicators of insolvency.

It’s noteworthy that due to the pandemic, the Federal Government introduced policies in 2020 that influenced the assessment of potential insolvent trading cases, that require deliberation and consideration.

The Great Escape: Defending Against Insolvent Trading Claims

We at Ramsden Lawyers often field queries about possible defences to an insolvent trading charge. The Act offers directors a lifeline, providing avenues such as:

• Believing in the company’s solvency;
• Acting based on competent advice;
• Absence from management when the debt arose;
• Taking preventive measures, like roping in an administrator

The Safe Harbour provision is another lifebuoy. It shields directors from personal fallout for debts raked up during insolvency, provided they’re working on a strategy likely to yield better results than the company tipping into insolvency. The goal? To urge directors to seize control, face potential insolvency head-on, and steer the ship toward calmer waters.

My company is insolvent… now what?

If your company is facing corporate insolvency, various avenues may be available. We will briefly consider each of the various options available to directors below to give you a brief understanding of what is involved in each of the different processes.

Receivership

Receivership is a procedure for an individual secured creditor to allow them to recover a secured debt. Unlike other options, this is not a collective benefit but rather for the benefit of a single creditor. This involves the appointed receiver being appointed to realise a person’s property. Commonly, in the insolvency context, a bank or other financier seeks to take security over the company’s property, and the appointment of the receiver results in the enforcement of that security in circumstances where there is a default under the relevant security agreement.

Liquidation

Liquidation is a process known as the ‘winding-up’ of a company, where it is shut down, its assets are sold, and the proceeds of the sale are used to repay its debts. A liquidator may be appointed by either creditors or members when a company is voluntarily wound up.  This allows the liquidator to gain control of the company’s affairs so that the company may be wound up in an orderly fashion in a way that benefits the existing creditors.

Voluntary Administration

Voluntary administration is the process that aims to rescue the company from financial adversity, where the powers of the directors are temporarily suspended, and an administrator is appointed to take control of the company to manage its affairs until creditors determine its course of action. The administrator then typically a course of action that they consider the most preferable option to maximise the return to creditors.

If you are considering your options concerning any of the above avenues, we recommend seeking legal advice at the earliest available opportunity to determine the most preferable route for your circumstances. If you require specific advice, Ramsden Lawyers Dispute Resolution and Litigation Division has expertise in guiding corporations through the nuances of corporate insolvency mechanisms.

Ramsden Lawyers – Your Beacon in the Insolvency Fog

Navigating the convoluted channels of corporate insolvency and potential insolvent trading can be daunting. However, with Ramsden Lawyers by your side, you’ve got 17 registered liquidators, and a robust team spread across Australia, ready to guide you through the storm.

Worried about the financial health of your company or insolvency implications? Don’t paddle alone in choppy waters. Reach out to Ramsden Lawyers today – we’re here to help you navigate towards safer shores.

The content of this article is intended to provide general guidance to the subject matter and must not be relied on as legal advice.  Specific advice should be sought about your circumstances.