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Susanne is a director of a small family company that has operated reasonably successfully for about eight years. Demand for the company’s product is strong and growing. Recently cash flow has been tight and the company has delayed payments to creditors and not submitted a couple of BAS statements so as to use the net GST that would otherwise be paid out.
The accountant has just shown her the annual accounts and asked her to sign the solvency declaration. Although the management team and her board colleagues assure her that the business fundamentals are good, she is concerned about the implications of signing under the current circumstances.
What should Susanne do?
The signing of a solvency declaration is a serious matter. Under s.588G of the Corporations Act (Australia), a director has a duty to prevent insolvent trading. This duty applies even if the director only suspects the company may be insolvent. Signing a solvency statement when Susanne has suspicions that the company is insolvent would open Susanne up to being liable for debts incurred by the company should it actually be insolvent.
Whilst Susanne could use the reasonable reliance on information provided by others defence provided under s588H(5), the fact that she is aware that the company has delayed the payment of debts and GST payments would weaken that argument.
Susanne should seek approval from the chairman of the board to obtain independent external advice on the solvency of the company. If that advice was that the company was solvent then Susanne could sign the solvency statement in good faith based on that advice. If the chairman refused to allow external advice to be obtained, Susanne's request to obtain such advice may provide her with some protection by having taken reasonable steps to prevent insolvent trading.
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Case Studies