Company Law

Running head: Company Law
Company Law

Company Law
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Contents
Answer to Q(a)............................................................................................................................................2
Issue............................................................................................................................................................2
Rules............................................................................................................................................................2
Application..................................................................................................................................................3
Conclusion...................................................................................................................................................4
Answer to Q(b)............................................................................................................................................5
Issue............................................................................................................................................................5
Rules............................................................................................................................................................5
Application..................................................................................................................................................6
Conclusion...................................................................................................................................................6

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Answer to Q(a)
Issue
The issue identified in the case study is advice being given to the liquidator that
if she can sue the directors Shilpa and Sonal to recover the debts owned by Sonu
Pty Ltd.
Rules
According to section 588G of Corporations Act 2001 (Cth), if a corporation
incurs debt during its insolvency and there are reasonable grounds to believe that
it has been insolvent, then the directors are personally liable for such default. It
triggers the imposition of civil and criminal penalty on the directors for violating
the provisions of section 588G (Harris, Hargovan and Adams, 2018a). The
directors are held liable for breaching this section if there is a failure on their part
to avert the company from acquiring debts in the following cases:
1. They were aware of the reasons for doubt about the insolvency of the
company.
2. A person who is of appropriate rational and in the place of a director must
be conscious about such situations.
As per section 588G, an offense has been committed by a person if :
1. Debt has been incurred by the company at a specific period.
2. He was at the position of a director when the debt was incurred.
3. The company was or had become bankrupt at the time of acquisition of
debt.

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4. It was suspected by the person at the time of acquisition of a debt by the
corporation that it had become insolvent or would be insolvent if the debts were
incurred by the company.
5. The person has deliberately failed to prevent the company from being
subject to debts (Keay, 2014).
In this context, section 95A of the Act establishes the test of insolvency. It states
that a person is a solvent when he is capable of repaying all the debts to another
person when they become due and are liable for being paid. It also states that a
person is bankrupt if he is not solvent. According to ASIC Regulatory Guide
2017, a company is insolvent if it has incurred continuous losses and is incapable
of producing proper financial information. It has also defaulted or would default
regarding its financial activities. Furthermore, legal action is threatened to be
taken against the company. So, it becomes a positive duty of the directors to avert
insolvency trading according to section 588G as per Corporations Act 2001(Cth)
(McLaughlin, 2018).
Potential insolvency indicates that responsibilities must be discharged by the
director by considering the commercial position of a corporation. According to
ASIC Regulatory Guide, the director has the duty to prevent insolvent dealing of a
company. If continuous losses have been incurred by the company in the past and
it is not capable of producing proper financial information, then it is to be
declared as insolvent. It has failed to carry on its financial activities successfully.
Furthermore, a legal action has been susceptible against the company. So, it
becomes the duty of the directors to avoid insolvent dealing in accordance with
the regulations of section 588G of Corporations Act 2001 (Cth) (Huggins,
Simnett and Hargovan, 2015).