This document discusses the options available to directors in case of insolvent trading risk and the consequences of borrowing more money and failing to repay it. It provides insights into the relevant sections of the Corporations Act 2001 (Cth) and includes references to relevant case law.
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Running head: CORPORATION LAW CORPORATION LAW Name of the Student Name of the University Author Note
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1CORPORATION LAW Question 1 Answer Here the raised question is the options which are available to the directors of the Rajiv’s company in case of insolvent trading risk. According to s.588Hof theCorporations Act 2001 (Cth), the director of any company has the following defences in case of insolvent trading risk- It was reasonably expected by the directors that the company at that time was solvent and also would remain the same even in case of incurring debt; or It was expected by the directors based on the supplied information by any subordinate that the company was solvent and it was believed by the directors to be reliable, competent and responsible in providing adequate information in relation to the company’s insolvency; or The director was unable to take part in company’s management at that relevant time because the director was ill or there was any other reason as good as that. All the reasonable steps were taken by the directors in preventing company’s incurring of debt. InKenna & Brown Pty Ltd v Kenna & ORS, Supreme Court of New South Wales, 1999it was held that although some full elaboration appearance of circumstances of escaping liability is given as a defence U/s 588H, the appearance disappeared after the introduction of s.1317.
2CORPORATION LAW In this given scenario, the company Happy Trails was having poor trading for the last two years and is unable in paying its debts. Rajiv is one of the directors of the company and is hoping to earn profits again if some amount of time is provided to the company by the creditors in respect of making some changes. The options which are available to the directors of the Rajiv’s company in case of insolvent trading risk are the defences providedU/s 588Hof the Corporations Act 2001 (Cth). Question 2 Answer Here the raised question is the consequences of borrowing more money and the failure in the repayment process. According tos. 588G (2)of theCorporations Act 2001 (Cth), contravention of this section is made by a person by failing to prevent the incurring of debt of the company, if it was in knowledge of that person that there were such suspecting grounds at that time or if the person was possessing any reasonable position of knowing the circumstances of the company. A civil penalty would be imposed upon himU/s 1317Eof theCorporations Act 2001 (Cth). According tosubsection (3)ofs.588Gof theCorporations Act 2001 (Cth)an offence has been committed by a person if- a)a debt is incurred by a company at any particular time; or aa)the person was director of that company at that time; or b)the company was at thetime either insolvent or by way of incurring the debt or debts becomes insolvent; or
3CORPORATION LAW c)the it was suspected by the person that the company was at that time either insolvent or by incurring the debt or debts becomes insolvent; or d)the person was dishonest in preventing the company’s incurring of debt. The absolute and strict liability applies in case of sub-section (3)(a) and sub- section (3)(aa) and (b) respectively. It was held inScott v Williams [2002] SASC 424that a director who fails in preventing company’s insolvent trading is to be partly relieved from the liabilityU/s 1317JAof theCorporations Act 2001 (Cth). In this given scenario, in spite of having the knowledge of company’s insolvency Rajiv being one of the directors of the company borrowed money on behalf of the company and failed to repay the same. Rajiv would be liableU/s 588G (2)and588G (3) of theCorporations Act 2001 (Cth).
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4CORPORATION LAW Reference Corporations Act 2001 Kenna & Brown Pty Ltd v Kenna & ORS, Supreme Court of New South Wales, 1999 Scott v Williams [2002] SASC 424