LAWS3100 Study Guide - Final Guide: Board Of Directors, Trading While Insolvent
Lecture 6 (continued) Chapter 12: Directors’ Duties
Duty to prevent insolvent trading
1) Overview
2) Four steps:
Does the section apply? See s588G(1)
Did the person breach s588G(2)?
Are any defences available?
If not, what are the consequences?
1) OVERVIEW
Who owes the duty?
Duty is imposed on only directors (de facto director and shadow directors). Unlike most of the other
statutory duties, it does not apply to officers.
Although a company cannot itself be appointed a director of another company, it is possible for a company to
be a shadow director of another company. This means where a company is a shadow company of another
company, then the first company (shadow company) is subject to duty in s588G not to have the second
company trade while it is insolvent.
If company A has substantial assets and is the shadow director of Company B which has few assets.
Company B is being wound up because it is insolvent and cannot pay its debts. The liquidator of Company B
will want to increase the funds available to pay the creditors of Company B. If the liquidator can establish
that Company A was a shadow director of Company B and breached s588G, then the substantial assets of
Company A can be made available to pay the debts of Company B.
Section 588G and 588V compared
What if the company which is a shadow company of Company B is also the parent company of Company B?
The tests for determining when there is a parent company-subsidiary relationship are outlined in 4-440 (page
85).
The parent company is under a statutory duty not to have its subsidiary trade while it is insolvent (s588V) If
the parent company breaches s588V, the liquidator of the subsidiary which is being wound up can then sue
the parent company in order to have the parent company contribute to paying the debts of the subsidiary.
Section 588G and 588V both impose a duty not to have a company trade while insolvent.
S588G (shadow company situation), the duty is imposed on the directors of the company.
S588V (parent company situation), the duty is imposed on the parent company of the subsidiary.
Step 1: Does the section apply?
What are the elements of the duty?
S588G applies to impose liability upon a person if:
-the person is a director of the company when the company incurs a debt
-The company is insolvent when it incurs the debt or becomes insolvent because it incurs the debt
-When it incurs the debt there are reasonable grounds for suspecting that the company is insolvent or
would become insolvent because it incurs the debut, and
-The director is aware at the time the debt is incurred that there are reasonable grounds for suspecting the
company is insolvent or a reasonable person in a similar position in the company in the company’s
circumstances would be aware.
When does a company incur a debt?
2 questions must be asked:
-What types of debts can be incurred?
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Document Summary
Duty to prevent insolvent trading: overview, four steps: If not, what are the consequences: overview. Duty is imposed on only directors (de facto director and shadow directors). Unlike most of the other statutory duties, it does not apply to of cers. Although a company cannot itself be appointed a director of another company, it is possible for a company to be a shadow director of another company. This means where a company is a shadow company of another company, then the rst company (shadow company) is subject to duty in s588g not to have the second company trade while it is insolvent. If company a has substantial assets and is the shadow director of company b which has few assets. Company b is being wound up because it is insolvent and cannot pay its debts. The liquidator of company b will want to increase the funds available to pay the creditors of company b.
