Directors - Consequences of insolvent trading

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

The Corporations Act provides some statutory defences for directors. However, directors may find it difficult to rely upon these if they have not taken steps to keep themselves informed about the company’s financial position.
 

Civil penalties

Contravening the insolvent trading provisions of the Corporations Act can result in civil penalties against directors, including pecuniary penalties of up to $200,000.
 

Compensation proceedings

Compensation proceedings for amounts lost by creditors can be initiated by ASIC, a liquidator or a creditor against a director personally. A compensation order can be made in addition to civil penalties.

Compensation payments are potentially unlimited and could lead to the personal bankruptcy of directors. The personal bankruptcy of a director disqualifies that director from continuing as a director or managing a company.
 

Criminal charges

If dishonesty is found to be a factor in insolvent trading, a director may also be subject to criminal charges (which can lead to a fine of up to $220,000 or imprisonment for up to 5 years, or both). Being found guilty of the criminal offence of insolvent trading will also lead to a director’s disqualification.

ASIC has successfully prosecuted directors for allowing companies to incur debts when the company is insolvent, and has sought orders making directors personally liable for company debts. ASIC also runs a program to visit directors, where appropriate, to make them aware of their responsibilities to prevent insolvent trading.

The good news is that taking steps to ensure your company remains financially sound will minimise the risk of an insolvent trading action. It may also improve your company’s performance.


Return to Directors

What's new

Revised RATA – the new ROCAP is on its way

ASIC’s project to launch a revised RATA (now ROCAP - Report On Company Activities and Property) is nearing an end after an extensive process including law reform and industry consultation.

ASIC works to ensure registered liquidators comply with obligations

An ASIC review has found that while registered liquidators are mostly doing the right thing when complying with their lodgement and publication obligations, there is room for improvement. 18-172MR. 13 June 

 

Industry funding

The Government has introduced new laws that change the way ASIC is funded. Regulated entities will receive an invoice for ASIC’s regulatory services delivered in the prior year. Find out what this means for registered liquidators.

 

Quicklinks

Insolvency Law Reform Act 2016

Releases on insolvency

Liquidator registration applications

Insolvency statistics

 

Sign up for:

ASIC Corporate Insolvency Update

Published notices

View insolvency and deregistration notices on the published notices website.

ASIC and registered liquidators

Last updated: 15/10/2014 12:00