Definition of Insolvent Trading

“Solvency” is defined in section 95A(1) of the Corporations Act 2001 as the ability to pay all debts as and when they become due and payable. A person or company which is not solvent is insolvent (s95A(2)). The courts generally take into consideration cash flows, balance sheets and the overall situation of the company when determining insolvency.

The definition of “debt” includes dividends, share buy backs, capital reductions and issuing redeemable preference shares. ”Directors” are defined as those formally appointed plus de facto and shadow directors and those managing while disqualified. Note that section 588G only applies to directors and not to management.

For a director this is a complex area of the law and it is very difficult for a director to understand the many legal cases that have been decided on this topic. So we have the following suggestions:

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