Secrets of Insolvent Trading, How to WIN!
Insolvent trading claims are more of an art than a science to quantify. What I mean by this is that I could give 4 Liquidators the same set of facts for a company and each of them would come up with a different date of insolvency and quantum of an insolvency claim.
With that being said what is an Insolvent trading claim and how do they work?
Insolvent trading is a claim that a Liquidator may bring against the Director(s) and Former Directors of a Liquidated Company for debts accrued that the Director at the time of the debt being incurred, knew or should have know was unable to be paid. Given that the claim is against the Director who incurred the debt, there is no point in a Director resigning their directorship to avoid this liability as the resignation is not a defence and gives no protection to such a claim. It does give protection against an insolvent trading claim for a period of time after the resignation occurred but not for an entire insolvent trading claim.
For example if the entire period of the insolvent trading claim was 1 January 2018 to the date of appointment of a Liquidator on 1 January 2020 and Director A resigned his directorship on 30 June 2019, Director B was the director for the entire life of the Company and Director C became the Director from 30 June 2019 to the date of Liquidation. Director A would be liable for the insolvent trading claim for 1 January 2018 to 30 June 2019 (including the GST, PAYG and Superannuation incurred during this period even though it is reported later), Director B would be liable for the full insolvent trading claim and Director C would be liable for the insolvent trading claim from 30 June 2019 to the date of Liquidation.
These claims have a joint and several liability meaning that a Liquidator does not care what proportion each Director pays towards their claim as long as the claim is paid. In terms of the above example of the insolvent trading claim, Director A and Director B would be liable for the same time frame of the insolvent trading claim and Director C and Director B would be joint and severally liable for the same time frame of the claim.
If Director B had no assets, the Liquidator would be looking at Director A to pay 100% of the insolvent trading claim for their respective time period as Director and Director C to pay 100% of the insolvent trading claim for their respective time period.
This is what it can feel like when a Liquidator issues an insolvent trading demand.
During the course of a Liquidator’s investigations, they will look at a number of indicators of insolvency which are as follows:
- When was the oldest debt incurred that is still outstanding at the date of Liquidation?
- Were statutory lodgements prepared and lodged on time or where they done consistently late? A major indicator of insolvency is that all BAS’ and tax returns were prepared and lodged on one day generally within a couple of weeks prior to the appointment of a Liquidator. This now has major personal implications for a Director – refer to our blog on personal implications.
- Were there any disputes on the debt incurred and were these disputes valid to a reasonable person?
- When was the Company first balance sheet insolvent and did that continue to the date of Liquidation?
- Did suppliers place the Company on COD terms?
- What was the date of the first payment the Company made that was dishonoured?
- Was the Company able to borrow funds from any source to pay its debts such as Bank, Related parties, the Director?
- What was the date of the earliest demand for payment sent to the Company?
- What was the date the Company paid suppliers outside the agreed terms including the payment of round amounts?
Practically these are very expensive claims for a Liquidator to bring against a Director and before a Liquidator gets to the Courtroom, in excess of $75,000 would have been spent sending demands, negotiating the claim, sending the claim to a lawyer, preparing the claim for court, filing the claim with court etc. Therefore, a Liquidator will want to be very confident that there is money to pay the claim at the end of the day from the Director’s personal assets.
Even though a report to creditors may state the Company was insolvent from a certain date, it is the practical implications of such a claim that they should be focused upon, namely if the Liquidator is going to purse the claim.
If there are no assets for a Liquidator to obtain, you may want to advise the Liquidator of this fact and put it in writing with documentary evidence. Documentary evidence would include a valuation of property and a current mortgage statement showing that the amounts are close to each other or the mortgage is more than the valuation amount.
If there are significant personal assets with plenty of equity for a Liquidator to pursue, the insolvent trading claim is more appealing to a Liquidator. Even though a Liquidator is able to do a property search under a Director’s name, you should remember that the LIQUIDATOR IS NOT ON YOUR SIDE and they are looking to get cheap information from you as to the prospect of their claim. If you have assets that could be pursued by a Liquidator, you do not want to give away the value of the assets or the quantum of finance against the assets cheaply. What you want to be doing is settling the claim before a Liquidator goes to Court which does take time. Do not be jumping at shadows though, meaning wait for the demand to be sent by the Liquidator prior to making any offer.
Just because a Liquidator decides to pursue an insolvent trading claim through court, the Court still needs to agree with the Liquidator and make an order for a Director to pay the Liquidator. It does not mean that when the Liquidator obtains the order, the Liquidator automatically becomes the owner of the Director’s assets. The Liquidator can then purse the Director back through Court for payment of the order and potentially Bankrupt the Director. This all takes time and large amounts of money to complete. Obviously, you do not want to get to Court stage without proper legal representation and a very good defence.
How your life will feel when you know that you do not have to go to Court in respect of an insolvent trading claim OR you could have just utilised the services of LemonAide and felt like this sooner.
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