Answer To: VICTORIA UNIVERSITY FACULTYOF BUSINESS SCHOOL OF LAW BLO 2205 CORPORATE LAW ASSIGNMENTSemester2...
David answered on Dec 29 2021
Issue:
The issue in question is whether there are any breaches of directors’ duties in relation to
insolvent trading?
Are there any defences available to the directors?
What penalties may be enforced upon directors if they are found to have breached the
insolvent trading provisions under the Corporations Act 2001?
Law:
Section 588 G of the Corporations Act 2001, deals with the directors’ duties to prevent
insolvent trading.
According to the section, it is the duty of the director of a company to prevent the company
from insolvent trading or to make sure that the company is solvent when debt is incurred. The
provisions of this section require a director of a company to prevent the company from
incurring a debt if:
- Firstly, the company is already insolvent at the time the debt is incurred.
- And secondly, by incurring that debt or a number of debts, the company becomes
insolvent.
And, at the time of acquiring of the debt, there are realistic grounds of believing that the
company is already insolvent, or would become insolvent by acquiring the debt.
Section 588 G (1A) enumerates various actions, which when performed, amount to incurring
of a debt. One of such acts is paying of dividend, and debt is said to be incurred when the
dividend is paid, or in case of a company with a constitution, when the dividend is declared.
Penalties imposed:
Section 588 G sets out two stages of infringement – one a civil penalty provision under sec
588 G(2) and the other a criminal offence under sec 588 G(3). As per section 588 G(2), a
director who is mindful that there grounds for questioning insolvency, or where a reasonable
person in similar circumstances would suspect insolvency, and such a director fails to
prevent the debt being incurred; then such a case attracts a civil penalty provision. As per
section 588 G(3), a criminal offence is done if at the time of incurring the debt, the director
suspected that the company is insolvent or would become insolvent as a result of incurring
the debt and was unsuccessful to avert the incurring of the debt provided that such failure
was dishonest.
In case of contravention of civil penalty provision in Sec 588G (2), the court may make one
or more of the following –
- An order for compensation under sec 1317H making the director personally liable to
make reimbursement equal to the loss suffered by the company as a result of such failure
to prevent insolvent trading.
- An order for penalty under sec 1317G setting a penalty on the director to pay a sum of
$200,000 to the Commonwealth.
- Disqualifying the director under section 206C from managing a corporation for a
particular period of time.
In case of a criminal offence under Sec 588G(3), the court may make an order for the
director to pay a penalty of $220,000 or imprisonment for up to five years or both.
Defences available:
Section 588 H provides a list of defences available to a director in case of a civil claim for
insolvent trading under Section 588G (3) –
- A director has a defence, if he had rational grounds to expect that the company was
solvent and would remain solvent even if it incurred the debt(s) and did expect so.
- If he had realistic grounds to believe that a knowledgeable and dependable person
responsible for providing sufficient information about the solvency of the company, was
satisfying that responsibility and the director had acted on the basis of such information.
- If he did not take part in the administration of the company due to his sickness or another
worthy reason.
- He took all rational steps from preventing the company from acquiring the debt,
including the appointment of administrator of the company.
The case law applicable is Metropolitan Fire Systems Pty Ltd v Miller (1997) 23 ACSR 699,
where in it was held that in order to determine whether reasonable grounds exist for
suspecting insolvency, an objective test needs to be carried out.
Another case law...