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Effects of insolvency On Directors, Creditors and Advisors

We have outlined below, the effects of insolvency on the directors, advisers, secured and unsecured creditors, but also what actions each of those parties are likely to take when they suspect they are dealing with an insolvent company.

In the event of a company possibly being insolvent, each group of stakeholders should make themselves aware of some specific matters. These are outlined below.

Section 588 G-Directors may be personally liable for debts incurred by the company if it trades while insolvent.

Section 588 V- A company may be liable for the debts of a subsidiary if it allows the subsidiary to trade while insolvent.

Section 222 Of the Income Tax Assessment Act- A director may be held personally liable for unpaid taxes.
Secured lenders

Insolvency is usually an event of default and may allow for the appointment of a receiver or voluntary administrator.

Be aware that the value of the security is at risk.

Security taken after a company is insolvent may be invalid, unless new monies are advanced.
Unsecured creditors

Section 588FA- Payment of accounts outside normal trading terms may be recovered as an unfair preference by a future liquidator if the liquidator can show that the creditor had a suspicion that the company was insolvent.


Section 60- Anyone who instructs or directs Directors may be deemed to be a director themselves and could also be personally liable for debts incurred by the company if it trades while insolvent.
Advisors need to be careful how they structure fee arrangements to guard against the fees being recovered by a liquidator as an unfair preference.