Duty To Prevent Insolvent Trading Essay

1889 words - 8 pages

The economic downturn has brought insolvency issues to the forefront of the minds of corporate directors and they have to confront issues they had not foreseen during boom times.The recent collapse of One Tel and Ansett highlight the impact of the provisions contained in the Corporations Act pertaining to insolvent trading and draw attention to the rights of liquidators and creditors in that regard.What is insolvent trading?Normally when a company is put into liquidation, there are significant debts left unpaid. To the extent that those debts were incurred after the company became insolvent, the directors of the company may be liable to compensate creditors for the amount of the debts. People have generally heard of lifting the corporate veil.Action against a director can only be taken when the company is in liquidation. That is, the procedure is not available in a Receivership or a Voluntary Administration although, in the initial stage of a Voluntary Administration, the administrator will normally make an assessment of the possible recovery if the company is liquidated.Who is responsible for insolvent trading claims?Insolvent trading actions are normally brought against the directors by the liquidator on behalf of all creditors. If the liquidator decides not to take action for some reason or another, creditors may take the action, individually or in groups.Where a measure of liability is clear, a director is normally well advised to reach a settlement with the liquidator rather than encounter multiple actions by a range of individual creditors. In other words, reaching settlement with the liquidator precludes action by individual creditors, as the compensation of the claim has been paid.In certain circumstances a director may also face criminal penalties for insolvent trading. The Liquidators cannot take criminal action. The only body that can initiate these actions is the Australian Securities and Investment Commission.The Rationalization for Insolvent Trading ProvisionsThere has been a greater trend in recent years to make directors more responsible for the actions of the company that they control. The legislation has also been altered to place a greater burden of proof upon directors when they turn to the statutory defenses. Directors must now consider the personal risk that they run when managing companies that are suffering financial difficulties.The Corporations Act provides that where a director allows a company to incur a debt, when the director (or a reasonable person in a like position) should have known that the company may not be able to pay that debt when it became due, that director should be personally liable for the debt.Case law has also removed the `silent director' defense by stating clearly that certain responsibilities cannot be avoided by the directors, that includes the duty to keep informed about the company's solvency and the debts incurred. These claims can be made against executive director and 'silent' directors.The...

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