Melbourne Pty Ltd has one company secretary, Jill and four directors: William, Jack, Susan and Sarah. William is the managing director of the company while the rest of the directors are non executive...

CORPORATE LAW
Running Head: CORPORATE LAW
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CORPORATE LAW
Corporate Law
Name
Institution
Corporate Law
Issue
Insolvent trading refers to the inability of companies to settle their debts. This is usually caused by mismanagement of companies by directors and other stakeholders. According to the Corporations Act, companies that operate at this stage are bound to face severe consequences which range from liquidation to restructuring of the company’s financial status. The companies are thus either completely closed or operated under new directors. Proving insolvency has been made difficult by the fact that there is usually slim evidence on the exact periods when the company was involved in insolvent trading. This is as a result of lack of clean and genuine financial records provided by the directors. Establishing the exact dates of such transactions has become a problem
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Different companies have different management structures. The directors are usually held liable for the overall management of the company affairs. This normally ranges from all the financial to administration work. However, it is usually difficult for directors to identify when they are insolvent. This therefore makes such directors prone to insolvent trading. However, directors who knowingly incur debt at a time when their company is in liquidation face severe consequences. Lipton and Herzberg in their book “Understanding Company Law” clearly state the two provisions for timing a company when it was insolvent. A company is usually presumed insolvent from the time a director is appointed to the time the case was obtained. Secondly, a company is presumed to have been insolvent from the time it started keeping reports that could not substantially explain the financial status of the company.
In relation to insolvent trading, the managing director at Melbourne Pty Ltd breaches the duties of directors by the fact that he does not make aware the other directors of the financial deterioration of the company. Subsequently, he oversees the sharing of the company’s dividends at a time when Melbourne was at its financial crisis. This in the end leaves the company liquidated thus making William liable of wrongful trading. According to the Corporations Act such an act is unlawful making the offenders face certain charges when found guilty by the court of law.
Sarah and Susan on the other hand, do not participate in the decision-making processes, as it is required. This is evident from the fact that they do not attend the company’s board meeting and do not even question William on any management issues. William in this case is given the benefit of doubt in matters concerning the company’s management. The company therefore operates under insolvent trading without their knowledge. It is however assumed that as the Company directors, they should to have been aware of the company’s financial status. Jack on the other hand is responsible for the company’s liquidation. This is due to his failure to notify the other directors on his intentions of resigning. It is observed that Jack signs a resignation letter but fails to lodge the letter with the company. He is therefore held liable for breach of director’s duties since at the time of the company’s liquidation he had not formally resigned. He was therefore expected as the company director to prevent the company from trading.
In relation to the information given by William, the other directors could defend themselves on the basis of misguidance. Susan, Sarah and Jack could possible argue that they had been given the wrong information by William. This is brought about by the fact that they had fully depended on William for an efficient management of the company. This therefore made them confident of the company’s financial position even though it was not the case. These directors could further give their defence by showing the summary report given to them by William which clearly indicated the solid condition of the company’s financial performance as at that financial period. This makes William liable of misguiding the other directors by the incorrect information he presented to them.
Consequently, due to the reports prepared by William the other directors were made confident of the Melbourne’s financial position and therefore had no doubt of the company’s solvency. It is due to this that the board decides to declare a...