16 March 2012 Insolvent trading...? Don't go there.

By Phillip Briffa, Solicitor

Director's duty to avoid insolvent trading

Section 588G of the Corporations Act 2001 imposes liability on a company director:

(a) who allows a company to incur a debt when the company is insolvent, or becomes insolvent by incurring the debt; and
(b) who 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; and
(c) whose failure to prevent the company from incurring the debt was due to dishonesty.

The duty to prevent a company from insolvent trading not only applies to persons who are formally or validly appointed as director but also to persons who act in the position of director, or in accordance with whose instructions or wishes the company’s directors are accustomed to act.

To meet the obligation to prevent insolvent trading, directors must, amongst other things:

(a) keep themselves informed about the company’s financial affairs and frequently assess the company’s solvency and cash flow;
(b) investigate financial difficulties immediately if concerns about the company’s financial viability are raised;
(c) seek appropriate professional advice to help address the company’s financial difficulties if such difficulties arise; and
(d) consider and act appropriately on advice received, in a timely manner.

Kleenmaid – A Case Study

On February 12 of this year, almost three years after whitegoods king Kleenmaid was placed in voluntary administration, ASIC has launched legal action against the company's directors for alleged insolvent trading and fraud.

The directors were charged with 18 counts of criminal insolvent trading of debts totalling more than $4 million together with $13 million of fraud committed against Westpac Bank. Two directors have also been charged with withdrawing $330,000 from the company’s bank accounts two days before it went into voluntary administration.

Insolvent trading attracts a maximum penalty of five years' jail and/or $200,000 fine. Whilst fraud carries a maximum penalty of 12 years' jail.

ASIC’s investigation focused on the solvency of the company around March 2008, since it alleges the company continued to trade despite becoming insolvent around this time.

The company was placed into voluntary administration in 2009 after it collapsed with approximately $100 million of debt owing to creditors, including former employees, customers, suppliers and banks.

The matter returns to Court on 17 May 2012.

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This article is not legal advice and the views and comments are of a general nature only. This article is not to be relied upon in substitution for detailed legal advice.

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