In Australia, insolvent trading occurs when a company continues to trade while it is insolvent, meaning that it is unable to pay its debts when they become due.
Under the Corporations Act 2001 (Cth), directors of Australian companies have a duty to prevent insolvent trading. They must ensure that the company does not incur debts that it cannot pay back, and they must take steps to minimize the loss to creditors if the company becomes insolvent.
If a company trades while insolvent and incurs debts, the directors may be held personally liable for those debts. They may also face civil and criminal penalties, including fines, disqualification from managing companies, and even imprisonment.
To avoid the risk of insolvent trading, directors should regularly monitor the company’s financial position, including its cash flow, debts, and assets. If the company is in financial difficulty, they should seek professional advice and take appropriate steps to restructure the company or wind it up if necessary