In 2008, there were over 12,000 corporate insolvencies Australia-wide. That figure is sure to increase significantly in 2009. This in turn will inevitably lead to an increased focus on, and number of, insolvent trading claims against directors.

Section 588G of the Act provides the basis for insolvent trading claims against directors. A director found to be in breach of this section could also see him/ herself being the subject of a civil penalty application by ASIC with a potential penalty of over $200,000 being imposed. ASIC may in such an application also seek to obtain compensation orders on behalf of creditors.

In exceptional circumstances, a director may also be found criminally liable for insolvent trading and potentially face jail time. The Supreme Court of Tasmania case of Kotek Pty Ltd heard in 2004, saw its director Timothy Williams, sentenced to 15 months jail for 38 charges of insolvent trading.

Insolvent trading claims are normally brought by a liquidator on behalf of all creditors.

However, individual creditors can make their own claim if the liquidator decides against making such a claim. If the action is taken by the liquidator, the compensation will be paid to the liquidator for the benefit of all creditors of the company. On the other hand, if a creditor takes the action the recovery will benefit that creditor solely.

The best way to ensure that an insolvent trading claim is not brought against a director is for the director to seek early accounting and legal advice if the company is finding it difficult to pay its debts as and when they fall due. While even the most prudent and well advised director can still be at risk of insolvent trading, dealing with the issue "head on" will certainly minimise the risks faced.

Directors also should be aware of ASIC's National Insolvent Trading Program, which was established in June 2003 and has the principal objective of identifying possible insolvent trading before it occurs.

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