Any company will be treated as insolvent when that company is not in a position to pay their debts to their creditors as and when the payments are due.

Now the question is during the insolvency period can the company engage in any kind of trading or business activity? As a matter of fact, the court has the authority to consider the present overall financial situation of the company in terms of commercial reality. 

Therefore, court will not only review the cash flow of the company, but also consider the balance sheet of the company, asset values and how much can be realized from their assets and ability of company to raise any funds as debt or equity.

Company insolvency can also be deemed in circumstances where directors will not be responsible for books and account records maintenance. Therefore, in such condition, a company will be presumed as insolvent for the period when records were not actually kept.

So, the question does not arise that the company under such situation will enter into trading activity. 

Director should prevent insolvent trading

Any kind of insolvent trading will occur when directors will allow the company to incur certain debts when insolvent. As an insolvent company, legally it is defined as a company who is not able to pay various debts as per due date.

The section 588G(c), will be applied not only during the time when company is declared officially as insolvent, but also if there are few reasonable grounds for having a suspicion that it is really insolvent, or soon going to become insolvent. 

Also, liability is found if company director is perceived to be fully aware of any reasonable grounds for this suspicion, or simply when any responsible person in similar position in similar company have been aware about such reasonable grounds.

Therefore, in actual practice, this will mean that directors cannot escape from their duty by showing that they were totally ignorant about the actual situation. 

The company directors must always check before incurring any new debts, whether there are any reasonable grounds available for assuming that company is really insolvent or will soon become insolvent because of the new debts which are being incurred. 

As a matter of fact, this duty to stop or prevent insolvent trading will be of company directors, who are aware about the financial status of company through adequately maintaining financial records, or any other reasonable steps.

What are the duties of directors?

Directors must always:

  • Remain up-to-date with financial position of their company.
  • Regularly prepare as well as review all the financial information in order to decide that there can be reasonable grounds for concluding that company is not able to make repayment of its debts as per the due date of the payment.
  • In case company directors suspect any chance of insolvency, they should immediately take positive steps for confirming the real position of company and also realistically assess all the available options.
  • May also seek necessary advice from any experts
  • They must act appropriately and also in a very timely manner and try to address any question of insolvency.