MLL221 Study Guide - Final Guide: Board Of Directors, Trading While Insolvent, De Facto
24 May 2018
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Corporate Law Topic Eight
• Understand the nature of the statutory director duty to prevent insolvent trading
S 588G:
• A director is under a duty to prevent the company incurring debts if there are reasonable grounds for
suspecting that it is insolvent.
• Purpose:
Encourage directors to carry out their duties properly if the company is at or approaching insolvency, and
provides a sanction if they fail to do so.
➢ Edwards v ASIC [2009]
WHO OWES THE DUTY:
Directors only
Duty to prevent insolvent trading imposed only on Directors
De facto director
• Someone who acts as director even if they have not been validly appointed
Shadow director
• Someone whose instructions the other directors are accustomed to follow
• A company may be a shadow director
➢ Note, s.V iposes a statuto dut o a paet opa ot to hae its
subsidiary trade while insolvent
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Does not apply to other Officers
WHAT TYPES OF DEBTS CAN BE INCURRED?
Deemed debts
When company takes action listed in s.GA the opa is deeed to hae iued a det
Also, certain payment to ATO deemed to be debt for purpose of s.588G (s.588F).
➢ paying a dividend
➢ making a reduction of share capital to which Division 1 of Part 2J.1 applies;
➢ buying back shares;
➢ redeeming redeemable preference shares that are redeemable at its option;
➢ issuing redeemable preference shares that are redeemable otherwise than at its option;
➢ financially assisting a person to acquire shares in itself or a holding company;
➢ entering into an uncommercial transaction (within the meaning of s 588FB).
➢ Debt is an obligation by one person to pay a sum to another.
➢ Principles:
➢ Debt must be for a specific amount
➢ Debt can be contingent
➢ Generally, debt must be incurred voluntarily
➢ E.g. Company contracts with Supplier to buy goods or services on credit terms
➢ Debt is the obligation to pay price at the agreed time for payment
WHEN IS A COMPANY INSOLVENT?
Section 95A
Company is insolvent if it is unable to pay all its debts, as and when they became due for payment
Based on a cash flow test
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Not determined on basis of surplus assets over liabilities
Powell v Fryer [2001]
The olusio of isole ust e deied fo a pope osideatio of the Copas fiaial
position, in its entirety, ased o oeial ealit… ‘egad should e had ot ol to the Copas ash
resources immediately available, but also to moneys which it can procure by realization by sale, or borrowing
against the security of its assets, or otherwise reasonably raise from those associated with, or supportive of,
it.
REBUTTABLE PRESUMPTIONS OF INSOLVENCY:
Continuing Insolvency
• Where Company being wound up and it is proved that Company was insolvent at a particular time
during the 12 months prior to the winding up application date, presumed that Company remained
insolvent thereafter
• Useful because only need prove Company was insolvent on one occasion in 12 month period prior to
winding up
• s.588E(3)
Failure to keep or retain adequate financial records
• Where Company fails to keep or retain financial records for period required under s.286, Company is
presumed to be insolvent for period it was in contravention
• Reason: Overcome difficulties of proving insolvency in absence of proper accounting records
• S.588E(4)
WHAT ARE REASONABLE GROUNDS FOR SUSPECTING INSOLVENCY?
What are reasonable grounds?
Reasonable grounds for suspecting insolvency arise when a director of ordinary competence who is capable of
haig a asi udestadig of the opas fiaial status ould suspect insolvency
Expect
Suspect
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Document Summary
Corporate law topic eight: understand the nature of the statutory director duty to prevent insolvent trading. A director is under a duty to prevent the company incurring debts if there are reasonable grounds for suspecting that it is insolvent. Encourage directors to carry out their duties properly if the company is at or approaching insolvency, and provides a sanction if they fail to do so. Duty to prevent insolvent trading imposed only on directors. Someone who acts as director even if they have not been validly appointed. Someone whose instructions the other directors are accustomed to follow. Note, s. (cid:1009)(cid:1012)(cid:1012)v i(cid:373)poses a statuto(cid:396)(cid:455) dut(cid:455) o(cid:374) a (cid:862)pa(cid:396)e(cid:374)t (cid:272)o(cid:373)pa(cid:374)(cid:455)(cid:863) (cid:374)ot to ha(cid:448)e its subsidiary trade while insolvent. When company takes action listed in s. (cid:1009)(cid:1012)(cid:1012)g(cid:894)(cid:1005)a(cid:895) the (cid:272)o(cid:373)pa(cid:374)(cid:455) is (cid:858)dee(cid:373)ed(cid:859) to ha(cid:448)e i(cid:374)(cid:272)u(cid:396)(cid:396)ed a de(cid:271)t. Also, certain payment to ato deemed to be debt for purpose of s. 588g (s. 588f). Making a reduction of share capital to which division 1 of part 2j. 1 applies;
