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As a company director in Australia, you have many obligations that you need to comply with. Understanding these obligations ensures you are not in breach any rules set in the Corporations Act 2001 (Cth). Some of these rules will bind you personally, including being compliant with your directors’ duties. Others relate to complying with company record keeping and reporting requirements. This article will cover your company’s annual reporting requirements, including filing a solvency statement, which could result in personal liability for directors if not properly completed. 

Solvency Reporting Requirement

All private companies in Australia must do one of the following: 

  1. Pass a directors resolution within two months of your review date stating that the company is solvent. If this occurs, then there is no requirement to notify ASIC, but the company must retain the resolution in its records; 
  2. If the company’s directors do not pass the above resolution, the company must lodge a Form 485 ‘Statement in Relation to Company Solvency’ within seven days after the above two-month time frame; or
  3. If the directors have determined by a majority vote in the resolution in Step 1 that the company is not solvent, the company must lodge a Form 485 within seven days of the resolution. 

If the company has lodged a financial report with ASIC within the previous 12 months, the above is not required. However, not complying with solvency reporting requirements can result in fines or penalties. 

Review Date 

When discussing the above requirement, the relevant date will be your annual review date. In most instances, this is the date on which you first registered your company. Each year, after this date, ASIC will send the company its annual report. The annual report will enclose: 

  1. current details of your company (registered address, principal place of business and a separate mailing address (if chosen); 
  2. invoice for your annual ASIC registration fees; and 
  3. your company’s corporate key. You can use this key to log onto ASIC Connect and update your company’s details. 

Directors Solvency Resolution

The easiest way to comply with the annual solvency requirements is to hold a directors meeting within two months after the company’s annual review date. At this meeting, all the directors will vote on whether, in their opinion, the company is solvent. 

The relevant test for the directors to contemplate is “whether the company can pay its debts when they fall due”. 

Clearly, there is a grey area here as companies can pay invoices late but not be insolvent. It would be prudent to determine whether the company has a systematic history of not being able to pay its debts. Again, this is in the directors’ opinion, and some directors may differ in their conclusion. A majority of directors must vote in favour of the company’s solvency for the resolution to pass. If there is an even number for and against, then the meeting chair will act as a tie-breaker. 

Circular Resolution

It is also possible for the directors of a company to pass a circular (written) resolution agreeing that the company is solvent. Additionally, all directions will need to sign the document to declare their agreement that the company is solvent. This would occur where all directors cannot attend a meeting per the quorum requirements, or it is more convenient to do so. For this to occur, all directors must be of the opinion that the company is solvent, as a written resolution needs to be unanimous. 

You should review the company’s constitution to ensure that your company can pass resolutions this way. If the company does not have a constitution, the replaceable rules in the Corporations Act 2001 (Cth) provide that companies can pass resolutions this way. 

Insolvent Trading 

In addition to lodging a Form 485 with ASIC, there is an ongoing obligation on all directors of a company not to trade while insolvent. For making this determination, we can look to the same definition above, being “whether the company can pay its debts when they fall due”. 

As a director, you would be breaching that obligation if: 

  1. you were a director during the time the company was trading while insolvent; 
  2. the company became insolvent or was insolvent during the period in which it incurred further debts; and
  3. there was a reasonable basis for expecting that the company was insolvent or would become insolvent because of that debt. This requires the directors to know, or ought to have known, that further debts would cause the company to become insolvent. 

Additionally, as a company director, you must stay informed as to the company’s financial position. This is a high threshold as not all directors will have the expertise to determine a company’s financial position. Likewise, engaging accountants or financial advisors is a prudent way to understand your company’s final position. Importantly, this does not remove your obligation not to trade while insolvent but allows you to make an informed decision. 

Consequences of Trading While Insolvent

If it is determined that a company was trading while insolvent, there can be several consequences. However, in this article, we will focus on the consequences for the directors personally. They include:

  1. civil penalties of up to $200,000; 
  2. compensation proceedings initiated by the creditors of the company. If a court determines that the company was trading while insolvent, they can rule that directors must personally satisfy these debts and liability is unlimited; and 
  3. criminal charges where the relevant director has acted dishonestly. 

For a director to avoid liability under this duty, it must call a directors meeting to bring the company’s financial status to the attention of the other directors. The directors can then vote to determine whether the company should be put into voluntary administration, liquidation or receivership. 

This is a complex area of law. If you suspect that the company is trading while insolvent, you should seek professional advice.

Key Takeaways 

Each year, within two months of a company’s review date, directors must pass a resolution to the companies solvency. Failing this, your company must lodge a Form 485 to state if they have determined that the company is solvent or not. Outside of this requirement, directors must ensure that the company is not trading while insolvent. A simple definition of insolvency is where the company cannot pay its debts when they fall due. If a director allows the company to continue to trade while it’s insolvent, they can face fines, imprisonment or personal liability to repay the debts. 

For more information on your solvency reporting requirements or filing a solvency statement, contact LegalVision’s business lawyers on 1300 544 755 or fill out the form on this page.

Frequently Asked Questions

What is insolvency?

Insolvency describes different arrangements a company may seek if it cannot pay its debts.

What is a solvency statement?

As a company director in Australia, you have many obligations that you need to comply with. One such obligation is filing a solvency statement.

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