What are the consequences directors can face for insolvent trading

Directors should take steps to make sure that their company remains financially sound. This will make the company performance better and also reduce the risk of insolvent trading.

Directors can face various penalties and consequences for insolvent trading. Penalties can include civil penalties, compensation proceedings and criminal charges.

There are statutory defences provided to directors under the Corporations Act, however if may be difficult for directors to use these if they have not kept themselves informed of the financial position of the company.

The Civil penalties for contravening the insolvent trading provisions of the Corporations Act can include monetary penalties of up to $200000.

Compensation proceedings can be made against a director in addition to civil penalties. These can be initiated by ASIC, a liquidator or a creditor. The payments in a compensation order can be unlimited and can often lead to a director becoming personally bankrupt. This disqualifies a director from continuing as a director or managing a company.

If dishonesty is found to be a factor in insolvent trading Criminal charges may be imposed on a director. This can lead to a fine of up to $220000 or imprisonment for up to 5 years or both. This will also lead to the disqualification of the director.

ASIC runs programmes to visit directors where this is required, and inform them of their responsibilities to prevent insolvent trading. Directors have been prosecuted by ASIC and made personally liable for debts incurred by the company during insolvent trading.