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Here we bring you the definition of an insolvent trading claim and how such claims can come about in relation to SMEs which fall within the scope of our work.

What is Insolvent Trading?

An insolvent trading claim is applicable to companies as opposed to directors as individuals, given they are treated under law as separate personalities. Directors have a duty under this to prevent insolvency and can be liable if the following grounds are met: a reasonable suspicion of insolvency or if debt is incurred while insolvent. Insolvency arises if there is a shortage of working capital, and if the company is unable to meet its debt obligations.

A breach of director’s duties can bring a civil prosecution, whereas dishonest conduct on part of a director can bring a criminal prosecution.

Who can bring a claim and what are the chances?

For SMEs, the chances of a claim of trading while insolvent are generally low. Liquidators can bring about a claim if the above criteria are met, however it can also be pursued by creditors. ASIC can also fund a claim under certain circumstances.

How do liquidators make the decision to pursue a claim?

Liquidators make decisions on whether a claim can be pursued based on available funding, including barristers and solicitors; whether there is sufficient evidence to stand up to scrutiny in court; the ability of defendants to pay and whether assets such as property can be recovered; and the amount of workload for the liquidator.

What is a safe harbour?

A “safe harbour” is when an insolvent claim cannot be pursued. There is a standard safe harbour process and a COVID-19 process.

There is no specific timeframe for this process, but it is a long and complex process that requires careful preparation.

Who can we help?

The experts at ‘What is Liquidation?’ understand this part of the Corporations Act both on a technical and practical basis.  Please call us on 1300 855 456 or send us a message to make a time for a no obligation 1 hour consultation.

SK Lawyers