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DIRECTOR’S DUTY TO NOT TRADE WHILE INSOLVENT

As part of the ATAS application and annual renewal process, AFTA conducts an annual assessment on your most recent Balance Sheet and Income Statement to demonstrate solvency pursuant to s2.5 of the ATAS Charter.
This obligation is in addition to the legal duties set out by the Corporations Act for Directors and officers of companies.

Director's duty to not trade while insolvent
Directors have a positive duty to prevent a company trading if it is insolvent. A company is insolvent if it is unable to pay all its debts when they are due. This means that before you incur a new debt, you must consider whether you have reasonable grounds to suspect that the company is insolvent or will become insolvent as a result of incurring the debt.

An understanding of the financial position of your company only at the time you sign off on the yearly financial statements is insufficient. You need to be constantly aware of your company’s financial position.

Is my company in financial difficulty?

ASIC list a number of indicators of financial difficulty which include:

  • Ongoing losses
  • Poor cash flow
  • Absence of a business plan
  • Incomplete financial records or disorganised internal accounting procedures
  • Increasing debt
  • Creditors unpaid outside usual terms
  • Overdraft limit reached or defaults on loan or interest payments
  • Overdue taxes and superannuation liabilities
  • An expectation that the ‘next’ big job/sale/contract will save the company.

There are various penalties and consequences of insolvent trading, including civil penalties, compensation proceedings and criminal charges.

What to do if you suspect your company is in financial difficulty?

ASIC advises the following: Get proper accounting and legal advice as early as possible, as this increases the likelihood of the company surviving. One of the most common reasons for the inability to save a company in financial distress is that professional advice was sought too late. Do not have a ‘head in the sand’ attitude, hoping that things will improve—they rarely do.

Duty to keep books and records

Your company must keep adequate financial records to correctly record and explain transactions and the company’s financial position and performance. A failure of a director to take all reasonable steps to ensure a company fulfills this requirement contravenes the Corporations Act.

For the purposes of an insolvent trading action against a director, a company will generally be presumed to have been insolvent throughout a period where it can be shown to have failed to keep adequate financial records.

For more information, see ASIC’s Regulatory Guide 217 Duty to prevent insolvent trading: Guide for directors.

For questions or concerns in relation to the Assessment of your Financials please contact Naomi Menon, National Manager – Compliance and Membership at (02) 9287 9984.