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Law Notes Business Associations I Notes

Directors’ Statutory Duty To Prevent Insolvent Trading Notes

Updated Directors’ Statutory Duty To Prevent Insolvent Trading Notes

Business Associations I Notes

Business Associations I

Approximately 213 pages

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Class 16 Directors’ statutory duty to prevent insolvent trading

Corporations Act ss 588G-588U. Note: Definition of insolvency in s 95A; definition of director in s 9.

CORPORATIONS ACT 2001 - SECT 95A

Solvency and insolvency

Definition of insolvency- s95A- cash flow test. Two important changes at insolvency. Insolvency official not directors. Creditors not shareholders. Reasons for insolvency regulation. No creditors free for all. Preserve priorities. Maintenance of capital for creditors. Avoidance provisions for fraudulent and uncommercial transactions. Solvent versus insolvent winding up.

Types and stages of insolvent administration. External administration. Voluntary administration. Appointment of a receiver. Creditors scheme of arrangement. Winding up. Liquidation.

588G is a civil remedy provisions but also provides a way to sue the directors on behalf of the creditors who have been harmed as a result of 588G.

(1) A person is solvent if, and only if, the person is able to pay all the person's debts, as and when they become due and payable.

(2) A person who is not solvent is insolvent.

"director" of a company or other body means:

(a) a person who:

(i) is appointed to the position of a director; or

(ii) is appointed to the position of an alternate director and is acting in that capacity;

regardless of the name that is given to their position; and

(b) unless the contrary intention appears, a person who is not validly appointed as a director if:

(i) they act in the position of a director; or

(ii) the directors of the company or body are accustomed to act in accordance with the person's instructions or wishes.

Subparagraph(b)(ii) does not apply merely because the directors act on advice given by the person in the proper performance of functions attaching to the person's professional capacity, or the person's business relationship with the directors or the company or body.

Note: Paragraph(b)--Contrary intention--Examples of provisions for which a person referred to in paragraph(b) would not be included in the term "director" are:

* section249C (power to call meetings of a company's members)

* subsection 251A(3) (signing minutes of meetings)

* section205B (notice to ASIC of change of address).

CORPORATIONS ACT 2001 - SECT 588G

Director's duty to prevent insolvent trading by company

(1) This section applies if:

(a) a person is a director of a company at the time when the company incurs a debt; and

(b) 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

(c) at that time, there are reasonable grounds for suspecting that the company is insolvent, or would so become insolvent, as the case may be; and

(d) that time is at or after the commencement of this Act.

(1A) For the purposes of this section, if a company takes action set out in column 2 of the following table, it incurs a debt at the time set out in column 3.

When debts are incurred [operative table]
Action of company When debt is incurred
1 paying a dividend when the dividend is paid or, if the company has a constitution that provides for the declaration of dividends, when the dividend is declared
2 making a reduction of share capital to which Division1 of Part2J.1 applies (other than a reduction that consists only of the cancellation of a share or shares for no consideration) when the reduction takes effect
3 buying back shares (even if the consideration is not a sum certain in money) when the buy-back agreement is entered into
4 redeeming redeemable preference shares that are redeemable at its option when the company exercises the option
5 issuing redeemable preference shares that are redeemable otherwise than at its option when the shares are issued
6 financially assisting a person to acquire shares (or units of shares) in itself or a holding company when the agreement to provide the assistance is entered into or, if there is no agreement, when the assistance is provided
7 entering into an uncommercial transaction (within the meaning of section588FB) other than one that a court orders, or a prescribed agency directs, the company to enter into when the transaction is entered into

(2) By failing to prevent the company from incurring the debt, the person contravenes this section if:

(a) the person is aware at that time that there are such grounds for so suspecting; or

(b) a reasonable person in a like position in a company in the company's circumstances would be so aware.

Note: This subsection is a civil penalty provision (see subsection 1317E(1)).

(3) A person commits an offence if:

(a) a company incurs a debt at a particular time; and

(aa) at that time, a person is a director of the company; and

(b) 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

(c) 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 paragraph(1)(b)); and

(d) the person's failure to prevent the company incurring the debt was dishonest.

(3A) For the purposes of an offence based on subsection(3), absolute liability applies to paragraph(3)(a).

Note: For absolute liability , see section6.2 of the Criminal Code .

(3B) For the purposes of an offence based on subsection(3), strict liability applies to paragraphs(3)(aa) and (b).

Note: For strict liability , see section6.1 of the Criminal Code .

(4) The provisions of Division4 of this Part are additional to, and do not derogate from, Part9.4B as it applies in relation to a contravention of this section.

CORPORATIONS ACT 2001 - SECT 588H

Defences

(1) This section has effect for the purposes of proceedings for a contravention of subsection 588G(2) in relation to the incurring of a debt (including proceedings under section588M in...

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