Directors generally need to prevent a company from incurring debts when it is insolvent. A failure to do so can lead to a pecuniary penalty, criminal prosecution or liability to pay compensation to unsecured creditors.
What Are the Elements of Insolvent Trading?
Typically, a director will may become liable if the requirements in s 588G of the Corporations Act are met. Simplistically those requirements are: -
- you a director;
- you fail to prevent the company from incurring the debt;
- you know the company is insolvent (or would become so) or a reasonable person would know it is insolvent (or would become so);
What Are Some of The Common Defences?
If the elements referred to are not made out, then you may have a defence. Additionally, a director may wish to rely on the defences in s 588H along the lines of: -
- there were reasonable grounds to believe the company was solvent;
- competent subordinates supplied information that the company was solvent;
- the director was absent from management at the relevant time;
- the director did what s/he reasonably could to stop the debt being incurred.
Recent amendments may also provide safe harbour defences.
How Do the Defences Work in Real Life?
It is not uncommon in these types of matters for directors to take steps to try and sell the company with a view to have creditors paid out or to seek refinancing or standstill arrangements. Where that applies a great deal depends on the exact circumstances.
* Disclaimer:- This publication contains general information which may not suit your particular needs or circumstances. It may be summarised and include generalisations. Details that may be important in your specific circumstances might not be included. Litigant strives to ensure that the information in this publication is accurate and up-to-date, but does not represent or guarantee that it is accurate, reliable, current, complete or suitable. You should independently evaluate and verify the accuracy, reliability, currency, completeness and suitability of the information, before you rely on it. The information in this publication is not legal or other professional advice. You should obtain independent legal or professional advice that is tailored to your particular circumstances if you have concerns. To the maximum extent permitted by law, Litigant excludes liability for any loss, however caused (including by negligence), relating to or arising directly or indirectly from using or relying on any content in this publication. Litigant asserts copyright over the content of this publication.