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We would like to
welcome you to the March edition of the Koffels E-Newsletter.
We hope you find this publication informative and that it provokes consideration
of some of the day to day legal issues you, or
your clients might face.
If you require further information about any of the topics covered in any
of our E-Newsletters or legal assistance generally please feel free to
contact Ross Koffel on (02) 9283 5599
Insolvent trading and available
defences
In the current state of economy,
this newsletter serves as a timely reminder to
directors of their general duties and some of the
consequences of insolvent trading.
Directors have a
positive duty to prevent insolvent trading by
their company. A company is insolvent if it is
unable to pay all its debts when they are
due.
Section 588G of the
Corporations Act 2001 (Cth) (Director's duty to
prevent insolvent trading by company)
stipulates that a director will engage in
insolvent trading in contravention of section 588G
if the company incurs a debt and:
- the company is insolvent at the
time of incurring the debt or becomes insolvent
by incurring the debt;
- at the time the debt is
incurred, there are reasonable grounds for
suspecting that the company is insolvent or will
become insolvent;
- the director had reasonable
grounds to suspect such grounds or a reasonable
person in a like position in a company in the
company's circumstances would be so aware;
and
- the director failed to prevent
the company from incurring the debt.
Section 588G also
applies to a "shadow" director, that is, a person
who is not formally appointed. A "shadow" director
can be a person who purports to assume that role
or if the directors of a company act in accordance
with their instructions.
There are various
penalties and consequences of insolvent trading
including civil penalties, compensation
proceedings and criminal charges.
Civil
penalties
A director may be
liable to pay a pecuniary penalty up to
$200,000.
Compensation
proceedings
ASIC, liquidators or
a creditor may commence proceedings against a
director personally. The director may have to pay
compensation in an amount equal to the debts
incurred and such payments are potentially
unlimited and could lead to personal bankruptcy of
directors. A bankrupt director is disqualified
from acting as a director or managing a
company.
Criminal
charges
If a director is
found to be dishonest, the director may be liable
to a fine of up to $220,000 or imprisonment for up
to 5 years, or both. A criminal charge will also
lead to a director's disqualification.
Clearly directors
must act in a manner which avoids any allegations
of insolvent trading. Taking steps to ensure the
company is financially sound will minimise the
risk of such allegations.
Below are some
available defences that directors may rely on if a
case of insolvent trading is
established.
- The director had reasonable
grounds to expect, and did expect, that the
company was solvent at the time the debt was
incurred and the grounds must be objectively
reasonable in all the circumstances. This
defence may be relied on by directors who are
actively participating in the company's
affairs.
- The director had relied on
information supplied by a subordinate, another
director or advisors to form the expectation
that the company was solvent and would remain
so. The director must show that he/she had
reasonable grounds to believe that that person
is competent and a reliable person and that
person had been delegated that duty by the
company to provide the director with adequate
information on the company's financial
affairs.
- The director took all
reasonable steps and engaged in positive actions
to prevent the relevant debt from being
incurred.
Section 1318 of the
Corporations Act allows a court to relieve a
director either wholly or partly from liability
for contravening the Corporations Act (including
s588G) if that director had acted honestly and,
having regard to all the circumstances of the
case, ought fairly to be excused.
If you or your
clients need advice as to the application of the
law, or if there are issues of insolvency then
please talk to us so that we can make practical
suggestions about going forward.
Please call Ross
Koffel to talk about solutions.
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About the Firm
The firm commenced operation in 1990 when Ross Koffel decided to return
to full time legal practice after 20 years in business as the Chief
Executive Officer of a national advertising and film production
company.
Today KOFFELS Solicitors and Barristers are a prominent boutique commercial
firm located in the CBD Sydney.
KOFFELS has a reputation for being a hard and diligent negotiator and
litigator.
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