Australian law imposes stringent regulations to ensure the equitable treatment of creditors and the preservation of a company’s financial health. One of the pivotal aspects of these regulations is the legal framework concerning insolvent trading claims against directors. Sections 588G, 588H and the safe harbour provisions (sections 588GA, 588GAAA, 588GAAB, 588GAAC) in the Corporations Act 2001 (Cth) play a crucial role in outlining the criteria, personal liability, defences, and safe harbour provisions for directors facing potential allegations of insolvent trading. This article will explain what is required for a liquidator to bring an insolvent trading claim against a company director. Likewise, this article will also discuss when a director bears no personal liability for the company’s insolvent trading.
Insolvent Trading Claim Against a Director
Section 588G of the Corporations Act addresses the issue of insolvent trading by company directors. This section establishes that directors have a duty to prevent a company from incurring debts while it is insolvent. This duty also requires you to ensure the company does not incur the debt if the company will subsequently be insolvent. In essence, this provision safeguards your creditors’ interests. This provision prevents you as a director from allowing your company to accumulate debt if it cannot repay these debts.
Criteria for an Insolvent Trading Claim
For a liquidator to successfully bring an insolvent trading claim against a director, their claim must meet the following criteria:
| Criteria | Explanation |
| Insolvency | The company you are director of must be deemed insolvent at the time when the debt was incurred. Alternatively, the company may be deemed insolvent at a point in time shortly after. |
| Reasonable Grounds | You, the director, must have had reasonable grounds to suspect that the company was insolvent. It will also suffice if you reasonably suspected the company would become insolvent by incurring the debt. |
| Debt Incurred | The debt in question must have been incurred while the company was insolvent. This limb will also be satisfied if your company became insolvent due to that debt. |
Personal Liability of Directors
Directors found in breach of their duty under Section 588G can face serious consequences, including personal liability for the debts incurred by the company while it was insolvent. Importantly, the amount you are personally liable for extends beyond the original amount of debt. The amount you are liable for can include any interest, fees or costs associated with that debt. You may have to compensate the company’s creditors for the losses they suffered due to your company’s trading insolvent.
Defences Available to Company Directors
Section 588H offers defences that directors can use against insolvent trading claims, including:
| Defence | Explanation |
| Reasonable Grounds to Expect Solvency | Directors can argue that they had reasonable grounds to believe the company was solvent at the time of incurring the debt or had a genuine belief that it would remain solvent even after incurring the debt. |
| Reasonable Reliance on Information | Directors may assert that they relied on accurate and up-to-date financial information or professional advice that suggested the company was solvent. |
| Debt Incurred for Good Faith Purposes | If the debt was incurred to reasonably benefit the company and its creditors, directors may be able to defend themselves against claims of insolvent trading. |
Safe Harbour Provisions
The safe harbour provisions recognise the challenges you, as a director, face when the company is facing financial distress. These provisions offer directors some protection if they take a course of action that is reasonably likely to lead to a better outcome for the company and its creditors than the immediate appointment of an administrator or liquidator.
Directors may enter a “safe harbour” if they can demonstrate that they took appropriate steps to develop a course of action that would lead to a better outcome for the company and its creditors as a whole. This might involve restructuring, seeking advice from qualified professionals, or implementing a well-considered turnaround plan.
If you are a company director, complying with directors’ duties are core to adhering to corporate governance laws.
This guide will help you understand the directors’ duties that apply to you within the Australian corporate law framework.
Key Takeaways
You will find that the Australian law on insolvent trading claims attempts to balance the interests of both creditors and company directors. Section 588G establishes a clear duty on directors to prevent insolvent trading, with corresponding consequences for breach. However, you will find the law recognises you as a director may be acting in good faith or under challenging circumstances. As such, the law offers defences such as the safe harbour defence. This defence protects your interests and upholds your company creditors’ rights. It is vital you as a director, are aware of these legal provisions. Your knowledge of these provisions will help you to navigate complex financial situations. Having knowledge of these provisions will also help you to fulfil your fiduciary responsibilities.
If you are a director of a company that is facing an insolvent trading claim and you are concerned about your personal liability, contact our experienced insolvency lawyers as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.
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