LAWS2203 Lecture Notes - Lecture 11: Insolvency Practitioner, Trading While Insolvent, Objectivist Periodicals
Duty to not trade whilst insolvent
Section 588G- only directors
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 31
➢ Includes: paying a dividend, buying back shares, uncommercial transaction
within the meaning of s 588FB
(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:
Section 588G(1)-(2) applies
(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).
‘insolvency’
• Section 95A(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.
• Use a cash-flow test: Bell Group v WBC(NO 9)
➢ ‘Commercial reality dictates that the assessment of available funds is not confined
to the company’s cash resources. It is legitimate to take into account funds the
1 http://www8.austlii.edu.au/cgi-bin/viewdoc/au/legis/cth/consol_act/ca2001172/s588g.html
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company can, on a real and reasoned view, realise by sale of assets, borrowing
against the security of its assets, or by other reasonable means.’
➢ Company is insolvent where it is proved by evidence that company can’t pay
debts as they fall due from its cash resources or from selling or mortgaging its
assets – Sandell v Porter (1966) 115 CLR 666
➢
‘Debt’
• Deemed debts- s 588G(1A) and 588 FF( relating to tax liabilities)
• Other debts in common law
o Common one is contract with a supplier to supply goods on credit
When is debt incurred?
• S 588G(1A) sets out the time of when the debt is incurred for deemed debt
‘reasonable ground to suspect’
Objective
Metropolitan Fire Systems Pty Ltd v Miller – objective test to be ‘judged by the
standard appropriate to a director of ordinary competence.’
• The objective standard of a reasonable director has been held to be a director of
ordinary competence with the ability to have a basic understanding of the
company's financial status: Miller
‘suspicion of insolvency’
Queensland Bacon Pty Ltd v Rees (1966) 115 CLR 266 the High Court stated that
“suspicion” does not amount to an actual belief, but extends beyond mere speculation.
• A suspicion that something exists is more than a mere idle wondering whether it exists
or not: it is a positive feeling of actual apprehension or mistrust amounting to a ‘slight
opinion but without sufficient evidence’…
• Consequently, a reason to suspect that a fact exists is more than a reason to consider or
to look into the possibility of its existence.
Relevant factors for suspicion
Williams v Scholz [2007] QSC 266
Factors that indicated reasonable grounds for suspecting insolvency were
• company traded unprofitably and accumulated losses
• exceeded its overdraft regularly
• sent monthly bank statements to confirm that overdraft had been exceeded
• bank officer called regularly when account limits exceeded or cheques
dishonoured
*a director may suspect that they may be insolvent
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Document Summary
Note: this subsection is a civil penalty provision (see subsection 1317e(1)). (3) a person commits an offence if: Section 588g(1)-(2) applies (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). Insolvency": section 95a(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, use a cash-flow test: bell group v wbc(no 9) Commercial reality dictates that the assessment of available funds is not confined to the company"s cash resources. It is legitimate to take into account funds the. 1 http://www8. austlii. edu. au/cgi-bin/viewdoc/au/legis/cth/consol_act/ca2001172/s588g. html company can, on a real and reasoned view, realise by sale of assets, borrowing against the security of its assets, or by other reasonable means. ".
