across the bar

trading in insolvent circumstances

by Steve - Posted 14 October 2008

If you are a director or a member of a small company or close corporation who is responsible for the daily management of business affairs, knowing when to pull the plug may not only be a good business decision it may also save you from personal liability. 

The basic rule is that if a company continues to trade when the director's know that the company is trading in insolvent circumstances, they open themselves up to potential liability. The question they need to ask is: can the company pay all its debts as and when they become due and payable? 

If the company continues to trade and incur further debt when it is already unable to pay all its existing debts, the directors may be held to be running the business recklessly. This can open them up to personal liability for loss suffered by a creditor during the time when such reckless trading takes place. 

If, however, the directors honestly and reasonably believe that they can trade the company out of its current difficulties, they may be able to avoid liability. 

Our R0.02: 

If you are not hands on with the financial management of the business, work closely with your fellow directors or company auditors who are to make sure that warning signs of financial distress are picked up quickly.

If you run a small business, chances are you see the company or cc more as an extension of yourself rather than a seperate legal entity. Don't let your pride or ego get in the way of making a sound business decision to close the doors. If you are worth your mettle as an entrepeneur, you will learn from the experience and your mistakes and will do better next time. Unfortunately, there may not be a next time if you lose the benefit of limited liability and are held personally liable for the debts of the business.