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Law Notes Business Associations 1 Notes

The Duty To Prevent Insolvent Trading Notes

Updated The Duty To Prevent Insolvent Trading Notes

Business Associations 1 Notes

Business Associations 1

Approximately 387 pages

A 243 page bible of cases and materials summaries. Includes all extra cases discussed in 2011 (e.g. ASIC v Adler) and super summaries intended for quick reference in an open book exam. Structure of cases and materials summaries is as follows:

Class 1 - Introduction to 'The Corporation' and incorporating under Australian Law
Class 2 - Separate Legal Personality
Class 3 - Implications of Limited Liability
Class 4 - The Corporate Constitution and Decision Making by the Board of Directors
Clas...

The following is a more accessible plain text extract of the PDF sample above, taken from our Business Associations 1 Notes. Due to the challenges of extracting text from PDFs, it will have odd formatting:

Class 16 - The Duty to Prevent Insolvent Trading

Corporations Act – s 588G – U

S 588G – Director’s duty to prevent insolvent trading by company

  1. Application: This section applies if:

    1. A person is a director of a company at the time the company incurs a debt; and

    2. The company is insolvent at that time, or becomes insolvent by incurring that debt, or by incurring at that time debts including that debt; and

    3. At that time there are RG for suspecting that the company is insolvent, or would so become insolvent and

    4. That time is at or after the commencement of this Act

(1A) is a debt table which shows when certain debts are incurred

Dividend – when paid or when declared if the constitution provides for declaration

Reduction of share capital – when the reduction takes effect

Buying back shares – when the buy-back arrangement is entered into

Redeeming redeemable preference shares that are redeemable at its open – when the option is exercised

Issuing redeemable preference shares redeemable otherwise than by option – when the shares are issued

Financially assisting a person o acquire shares in itself or a holding company – when the agreement to provide assistance is entered into or, if there is no agreement, when assistance is provided

Entering into an uncommercial transaction other than by court order – When the transaction is entered into

  1. Failure to prevent debt: By failing to prevent the company from incurring the debt, the person contravenes this section if

    1. They are aware that at the times there were such grounds for so suspecting or

    2. An RP in a like position in a company in the company’s circumstances would be so aware

  2. Where a company commits offence: A person commits an offence if:

    1. A company incurs a debt at a particular time

aa. At that time, a person is a director of the company; and

  1. The company is insolvent at that time, or becomes insolvent by incurring that debt, or by incurring at that time debts including that debt; and

  2. The person suspected at the time when the company incurred the debt that the company was insolvent or would become insolvent as a result of incurring that debt or other debts (as in (1)(b))

  3. And the person’s failure to prevent the company incurring the debt was dishonest

(3A) An offence based on (3) absolute liability applies to (3)(a)

(3B) For the purpose of an offence based on (3); Strict liability applies to (3)(aa) and (b)

[Note Hall v Poolman – conduct of directors attempting to save the business by negotiating, though unsuccessfully, a settlement with the ATO was held to justify relief from liability until a reasonable business person would have been aware that the business couldn’t be saved in the short term [w/in 3 months ] under s 1317S]

S 588H – Defences

  1. Application – This section has effect for the purpose of proceedings for a contravention of s 588G(2) irt the incurring of a debt (and proceedings under s 588M irt incurring a debt)

  2. Defence of reasonable presumption of solvency – It is a defence if it is proved at the time when the debt was incurred that the person had RG to expect, and did expect, that the company was solvent and would remain solvent if the debt and any other debts incurred at the time, were so incurred

  3. No general limits: WLOG (2) it is a defence if it is proved that, at the time the debt was incurred the person:

    1. Had RG to believe and did believe,

      1. That a competent and reliable person (other person – OP) was responsible for providing to the first person, adequate information about whether the company was solvent; and

      2. That the person was fulfilling that responsibility; and

    2. Expected, on the basis of information provided to them, that the company was solvent at the time and would remain solvent when the debt and any other debts incurred at the time, were so incurred

  4. Defence of illness: If the person was a director of the company when the debt was incurred, it is a defence if it is proved that, because of illness or for some other good reason, he or she did not take part at that time in the management of the company

  5. Defence of reasonable steps: It is a defence if it is proved that the person took all reasonable steps to prevent the company from incurring the debt

  6. Matters in determining defence: In determining whether a defence under (5) has been proved, the matters which regard is had include:

    1. Action taken with a view to appointing an administrator and

    2. When that action was taken; and

    3. The results of that action

Division 4 – Director Liable to Compensate

Subdivision A – Proceedings against Director

s 588J On application for civil penalty order, court may order compensation

  1. Where, on application for a CPO against a person in relation to a contravention of s 588G(2) if the court is satisfied that:

    1. The person committed a contravention irt incurring of a debt by a company; and

    2. The debt is wholly or partly unsecured; and

    3. The person to whom the debt is owed has suffered loss or damage irt the debt because of the company’s insolvency

The court may (w/o/n it makes a PPO under s 1317G or an order under s 206C for disqualification) order the person to pay compensation equivalent to the loss

  1. Liquidator can intervene in proceedings relating to a CPO for contravention of s 588G(2)

  2. And is entitled to be heard on certain matters (726)

S 588K (Criminal court can do the same on an application under s 588G(3)

S 588L Enforcement of order under s 588J-K – These two orders can be enforced as if a judgment of the court

S 588M – Recovery of compensation for loss resulting from insolvent trading

  1. Application: This section applies where:

    1. A person (director) has contravened s 588G(2)-(3) irt the incurring of a debt and

    2. The person (creditor) to whom the debt is owed has suffered loss or damage irt the debt because of the company’s insolvency; and

    3. The debt was wholly or partly unsecured when the loss or damage was suffered; and

    4. The company is being wound up

Whether or not

  1. The director has been convicted of an offence irt the...

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