Corporate Insolvency and Director Liability
Added on 2020-04-07
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Corporate Law
ContentsIntroduction......................................................................................................................................3Discussion........................................................................................................................................3Conclusion.......................................................................................................................................9References........................................................................................................................................9
IntroductionThe directors of a company always think about making the business successful. In thesituations, when the company functions as per the plan and achieves success, the directors do notthink about the adverse situations. In such circumstances, the duties of the director are notallocated towards the shareholders, but towards the creditors, who might not be paid. It becomesa major duty of the director to prevent a company from performing trade or business in a case ofsolvency. Allowing a company to perform trade during insolvency is considered as a breach ofduty on the part of director and it might also have serious financial impact over the directorpersonally. They can be held liable for insolvent trading, which means, they might personally beheld liable for the unpaid debts of the company incurred at the time when the company wasinsolvent. In this paper, the duties and liabilities of the director towards the company during theperiod of insolvency will be taken into consideration in detail. DiscussionSection 95A of the Corporations Act of Australia deals with the issue related to thesolvency and insolvency of a company. Under this section, an individual is considered assolvent, if he/she is able to pay all the debts and vice versa for insolvency. It means, a companyis considered as insolvent if and when it is unable to pay the debts which it owes to others. Thereare various indicators which are considered while determining the insolvency of a company.However, it depends upon the company and its directors, who might be required to obtainprofessional advice if essential[CITATION Cac15 \l 1033 ].The Corporations Act imposes general duties on directors and officers of the company,which include the duties to exercise their powers and duties with care and diligence as a
reasonable person in order to ensure others about the financial position of the organization andthat they do not trade in situation of insolvency[CITATION Eur131 \l 1033 ]. It becomes theduty of the director to exercise their powers and duties in the best interests of the company forproper purpose[CITATION asi17 \l 1033 ]. It becomes the duty of the director not to improperlyutilize their position or the information obtained through position to gain an advantage forthemselves or others or to cause damage to the company. In addition to it, it is the duty of thedirectors not to trade during insolvency and to keep the books and records regarding the financialposition and performance[CITATION rea17 \l 1033 ].The potential liabilities a company’s directors in the event of a company that becomesinsolvent include the best interests of the company. It is the responsibility of a director to governthe company on behalf of its shareholders. There are several duties for a director to possess incommon law as well as under the legislation of Australia i.e. the Corporations Act. The mainareas of possible personal liabilities of a director include providing security over private assetsand to ensure that the company does not trade in insolvency. The main objective of the DirectorPenalty Regime of ATO is to ensure that the directors ensure that the company follows thetaxation and superannuation responsibilities and they take appropriate and prompt actionregarding the employee entitlements[ CITATION Leg16 \l 1033 ]. There are various opportunities for a company taking into consideration, the position ofdirector in the situation, when the company is presumed to be insolvent. The directors of thecompany in financially troubled situation, who wish to avoid the allegations of wrongful trading,are required to ensure that they possess sufficient and appropriate financialinformation[CITATION The142 \l 1033 ]. They are required to be alert towards danger signs,which include pressure from creditors and they should be able to draw conclusions from the
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