Insol­vent trad­ing…? Don’t go there.

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.