What factors into an insolvent trading claim?

Aside from the company being in liquidation, the factors in an insolvent trading claim are:

  1. The company must have been insolvent when the debts were incurred.
  2. The debts must remain unpaid at the time of the liquidation.
  3. The claims must be made against people who were company directors at the time debts were incurred.
  4. There were reasonable grounds for the director to suspect the company was insolvent.

A company is insolvent when it cannot pay its debts as and when they become due and payable. The Corporations Act defines solvency and insolvency as:

Section 95A — Solvency and Insolvency

(1) A person is solvent if, and only if, the person is able to pay all the person’s debts, as and when they become due and payable.

(2) A person who is not solvent is insolvent. A person is defined to include a corporation.

For an insolvent trading claim, the debt must be incurred, not just accrued, when the company is insolvent. Incurring a debt is the legal creation of a debt that did not previously exist. Accrued debts usually relate to ongoing contractual agreements.

Contractual agreements are incurred at the time of the original agreement and only become payable (or accrue) at a later date. If the original agreement was made while the company was solvent, and the later amounts only accrue because of that original contract, those debts will not form part of an insolvent trading claim. For example, reoccurring lease payments are under a contract that was entered into prior to the company’s insolvency.