Question

1. Masks R Us Pty Ltd is now trading unprofitably as a result of the actions of Tom and Dic stated above (in question 5). The company now has difficulty in paying its debts and is falling behind in its tax payments to the Australian Taxation Office. Harry, as a director of Masks R Us Pty Ltd, is concerned about the increasing company debts and the difficulties in the company’s cash flow to make timely payments. You are an accountant. Harry consults you for advice on whether he can be personally liable, in these circumstances, for the company’s debts under the Corporations Act.

Advise Harry with reasons for the advice given.

Answer 1

Under the provisions of Corporations Act of Australia a director of a company can be personally held liable for the debts of the company if the director has failed to ensure that the company does not trade while it is insolvent i.e. while its operating profits are low or its cash flows are low.

As per the provisions of Corporations Act of Australia common signs of insolvency are:

· Low operating profits or cash flows

· Problems with paying loans on time

· Problems with paying creditors on time etc.

Here Harry has allowed the company to trade while insolvent and hence he has breached the civil provisions as well as criminal provisions of the Corporations Act. Thus Harry can be personally liable for the company’s debts under the Corporations Act.