Law & Practice

Topics: Non-executive director, Debt, Managing director Pages: 6 (2128 words) Published: August 16, 2010
In this topic, we will try to find out about insolvent trading and how it is happened and while Company becomes insolvent what are the duties for directors in order to save unsecured creditors. We will also find out how directors become liable for their action in regard to insolvent trading and if they breach any law for insolvent trading what are the consequences they have to suffer and also law has given some defences for insolvent trading for directors in order to avoid penalty. S9 defines a director of a company- a person who is appointed to the position of a director or alternate director regardless of the name given to their position. Managing director is responsible for overall daily business. Non executive directors have part time involvement with the company. They participate board meeting or meeting of board committees. They monitor the activities of the management team bringing an independent view often an outside or broad perspective to the board’s deliberations. They consider the interest of the company and general body of shareholders. Insolvent trading:

In order to answer the question of insolvent trading, we will find out when company becomes insolvent. Under s95A definition of insolvency is regarded when a Company unable to pay its debt when it becomes due. Usually Insolvency is not determined by looking at the balance sheet of a company and the surplus of assets over liabilities. It emphasises on cash-flow which is called “cash flow test”. Companies may experience both types of insolvency simultaneously. If we see the Powell V Fryer[2001] SASC 59, the Judge ruled that from Companies financial position, insolvency must be derived that it should not look only cash resource but also to money. In this case we found while company paid dividends and went into liquidation and became insolvent. If a company has few assets to pay its creditors while the company became insolvent and this insolvent trading section helps to protect creditors by lifting the corporation veil and put a duty on directors to prevent insolvent trading while there is a reasonable ground they can’t pay its debt. The directors became personally liable for its debt while company became insolvent. Before finding out whether directors breach any law for insolvent trading or not under s 588G, we look at the case of Daniels V Anderson (1995) 13 ACLC 614. The court held that for company business and finances they should familiarise themselves and made inquires and monitoring management. In regards to management directors must be pro active and could be achieved through: they have to get information about company’s matter. Attendance of meeting, they should not rely on others and make their own inquires. In decision making process they have to participate. In this case we see, Susan is merely rely on William and doesn’t attend regular meeting. Sarah also relied on William as she is his wife and never questioned of activities done by William. Only Jack is the active person who attended meeting and worked properly till July 2008. Due to illness, Jack decided to resign and he couldn’t attend meeting. Under s203A director can give to its company’s registered office and also to notify the ASIC under s205A (1) & (2) but he failed to do so. It is director’s duty to prevent insolvent trading under s 588G if there is reasonable ground that company will not be able to pay its due and become insolvent. Directors are controlling management and they have power to prevent debt while incurred. Under s 295(4) (c) director’s obligation to declare company’s financial statement whether or not there are any reasonable grounds, company will be able to pay its debt as when it is due and payable. In this case we found that William misleads other directors as well as declaration of financial statement. Also we can use Morley v. State wide Tobacco Services Ltd (1992) 8 ACSR (305) case for this as after dying directors husband, wife who is also a...
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