Insolvent Trading
Executive Summary
This research report documents the findings of an empirical study of judicial findings (of superior courts) relating to the duty to prevent insolvent trading. The duty to prevent insolvent trading is the most controversial of the duties imposed upon company directors.
Those who support the duty argue that it provides appropriate protection for the unsecured creditors of companies. Those who oppose the duty argue that it has the effect of making directors unduly risk adverse which can result in directors too quickly putting companies into voluntary administration or liquidation for fear of personal liability (which may have a negative financial impact on unsecured creditors).
Overview
Key points
This guide is intended to help directors understand and comply with their duty to prevent insolvent trading.
It sets out:
the relevant legal background key principles that we consider directors need to take into account in order to comply with the duty to prevent insolvent trading guidance on how to assess whether a director has breached their duty
Insolvent Trading – A feasible study
1 Introduction
Insolvent trading occurs when a company incurs debts when it is insolvent. Breach of the duty to prevent insolvent trading can result in directors being held personally liable for the debts which are incurred by the insolvent company.
Legal Definition of Solvency
"Solvency" is defined in section 95A(1) as the ability to pay all debts as and when they become due and payable. A person or company which is not solvent is insolvent (s95A(2)).
2 The Duty to Prevent Insolvent Trading: An Overview
The duty to prevent insolvent trading is currently contained in section 588G of the Corporations Act.
It requires directors to monitor the financial status of their company continually to make sure that it is not trading while it is insolvent
Objective: protection of
This research report documents the findings of an empirical study of judicial findings (of superior courts) relating to the duty to prevent insolvent trading. The duty to prevent insolvent trading is the most controversial of the duties imposed upon company directors.
Those who support the duty argue that it provides appropriate protection for the unsecured creditors of companies. Those who oppose the duty argue that it has the effect of making directors unduly risk adverse which can result in directors too quickly putting companies into voluntary administration or liquidation for fear of personal liability (which may have a negative financial impact on unsecured creditors).
Overview
Key points
This guide is intended to help directors understand and comply with their duty to prevent insolvent trading.
It sets out:
the relevant legal background key principles that we consider directors need to take into account in order to comply with the duty to prevent insolvent trading guidance on how to assess whether a director has breached their duty
Insolvent Trading – A feasible study
1 Introduction
Insolvent trading occurs when a company incurs debts when it is insolvent. Breach of the duty to prevent insolvent trading can result in directors being held personally liable for the debts which are incurred by the insolvent company.
Legal Definition of Solvency
"Solvency" is defined in section 95A(1) as the ability to pay all debts as and when they become due and payable. A person or company which is not solvent is insolvent (s95A(2)).
2 The Duty to Prevent Insolvent Trading: An Overview
The duty to prevent insolvent trading is currently contained in section 588G of the Corporations Act.
It requires directors to monitor the financial status of their company continually to make sure that it is not trading while it is insolvent
Objective: protection of