I was discussing last month’s article on Criminal Insolvent Trading with some staff members through February. This came about as we are in the process of putting together an insolvent trading claim against a director. A major part of that investigation is the proving of solvency (which should not be that hard in this case).
The discussion included the indicators of insolvency. Most readers would be aware of the 14 Indicators of Insolvency set out in the Plymin decision in 2003 [ASIC v Plymin (2003) 46 ACSR 126]. We have written on them previously.
These indicators give a range of factors that should lead directors and business owners to consider or suspect that the company or they are insolvent, and make an examination of the position and to take corrective action. That is the theory.
In our Determining Solvency Fact Sheet we say “There would be few occasions where all of these indications are present, just as there would be few cases of insolvency where none of these indications were present. Overall, they represent a reasonable set of circumstances that, cumulatively, indicate insolvency”. Individually they are not conclusive.
But what about one factor, one indicator that is so obvious that creditors and liquidators can use it to prove, not just indicate, insolvency. Is there a factor that can be used to deem insolvency in actions against directors for insolvent trading and voiding other transactions involving the directors? I realise that this is not the favorite topic of people that act for or advise company directors, and a favorite one when they act for a client who has lost money to a company.
Readers are probably aware that section 588E of the Act allows a company to be deemed insolvent in actions against directors if it does not keep proper records – assumedly on the basis that if a liquidated company has no records there is no way of proving that the company was ever solvent.
Our discussion led to one factor could be added to the deeming provisions to allow more an efficient prosecution of insolvent trading and other claims, but still be fair to directors.
Non-Payment of Statutory Debts (tax debts) for a period
Non-payment of tax debts is an indicator of insolvency, but should non-payment of these debts for a period (whether 3, 4 or 6 months) be a trigger to retrospectively deem a liquidated company as insolvent, as the lack of records retrospectively deems insolvency?
That is, if I get appointed as liquidator to a company and the company had outstanding tax debts that went back many months, should the court be able to deem the company as insolvent from the time that unpaid tax was 3 or 4 or 6 months overdue?
That would mean (using 6 months for example) that a liquidated company with outstanding tax debts that are 10 months old would be deemed insolvent for the last 4 months before liquidation (after the outstanding tax debts are six months old), and any debts (tax debts and other creditor’s debts) incurred in that last 4 months could be claimed in an insolvent trading action without having to prove insolvency separately.
Is it fair to directors? I believe so. They know, or should know, whether tax debts are unpaid and should be aware of their responsibilities in relation to dealing with unpaid tax debts and incurring debts whilst the company is insolvent. Directors do not wake up one day and just find that tax has not been paid for 12 months, they should know it from month to month. At the very least it would encourage directors to keep tax debts no more than 5 months overdue.
The ATO has the DPN regime to encourage directors to take some action or become personally liable, but that does not help the ATO or any other creditors recover debts if company is placed into liquidation within the 21 days allowed. The director avoids personal liability in that case.
Given that tax debts are set by the Tax Acts and not by commercial usage or terms, that the due dates are certain and the amount can easily be calculated, without a genuine dispute there is no reason why tax debts should not be paid when due. Maybe payment will be made shortly thereafter if the company has a ‘cash flow’ problem. But after 3 or 4 or 6 or 12 months late?
Surely directors should be aware, or at the very least suspect, that the company is insolvent if these debts exceed more than that time overdue. It should be obvious to them and their advisors. And if they keep incurring debts after that time, surely they should not be able to seek the protection of the corporate veil.