Legal
Issue No. 16 - April/May 2004
Do you trade the company on?
by Dr David Corkindale
Often the judgment made by directors to trade on is based upon incorrect information or poor quality information. Trading on with financial difficulties is likely to have severe financial and emotional repercussions for the directors.
The Law
The law provides that if a company incurs a debt and the directors are aware that there are reasonable grounds for suspecting the company is insolvent or would become insolvent by incurring that particular debt, they may be personally liable to account to the company for such debts and even worse possibly face criminal sanctions.
In the commercial world society has become intolerant of corporations and their directors leaving behind unpaid creditors. This has been echoed by higher standards of corporate governance which are expected by creditors, shareholders, the Australian Taxation Office, the courts, insolvency practitioners and regulatory bodies such as the Australian Securities & Investment Commission (ASIC).
The Warning Signs
Some of the telltale warning signs of a company being insolvent or near insolvent are:
- Not paying creditors on time;
- Having to make arrangements with creditors for extended terms;
- Not paying group tax on time;
- Not paying sales tax on time;
- Not paying BAS tax payments on time;
- Not paying IAS tax payments on time;
- Not paying payroll tax on time;
- Hovering at or above credit limits such as overdraft or other lending facility limits;
- Not making lease payments on time;
- Not paying employee entitlements on time such as compulsory superannuation payments or the provision for annual leave and long service leave;
- Having cheques dishonoured;
- Cash output exceeding cash input on a regular basis.
A director is not in a position to make a proper assessment unless financial records are up—to—date. Management accounts must be produced on a regular basis (preferably monthly) and regularly reviewed with your ...
