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Assignment Of LAW | Insolvency Consideration - LG237

   

Added on  2020-03-02

11 Pages2559 Words90 Views
Running Head: Law 1Law

Law2Introduction:Insolvency is considered as that situation under which liability of the company exceeds the assetsof the company. Section 95A of the Corporation Act 2001 states that person is considered assolvent, if individual paid the debts and discharge all the liabilities of the company at the timewhen such debts and liabilities become due and payable, and person or organization isconsidered as insolvent if they are not solvent. In case, Sutherland v Hanson ConstructionMaterials Pty Ltd (2009), Court stated that on the primary basis Solvency was determinedthrough cash flows of the company. However, it must be noted that position of the balance sheetwas not considered as solvency test (Corporation Act, 2001). This essay states various aspects of insolvency and role of directors, ASIC, creditors and otherstakeholders of the company in the process of insolvency. Lastly it is concluded with briefconclusion.Signs for insolvency: As per the regulatory guide 217 of the ASIC that is Duty to Prevent Insolvent Trading: Guide forDirectors (2010), states the following signs of insolvency:History of the company includes trading loss on continuous basis.Cash flow difficulties are facing by the company.Company is facing the difficulty in selling their stock or in collecting the debts. When Company negotiates the new limit with the current financier. Outside parties or creditors threatened or commence any legal action against thecompany.

Law3Measures taken by directors in these situations:It is the duty of director to take reasonable measures in case of insolvency, and these measuresare stated below:Director must not incurred any further debt, unless there are chances related to therestructuring & refinancing of the business, and there is availability of equity funding forthe purpose of recapitalizing the company. Voluntary administrator or liquidators are appointed by directors. In case company becomes insolvent or there is any risk related to insolvency, then it isthe duty of director to consider the interest of the creditor’s, employees, and otherstakeholders of the company. There are some other duties also which includes duty for restricting the trading of thecompany if company becomes insolvent (ASIC, 2010). Liability of Directors:Section 588G of the corporation Act 2001 impose duty on director of the company to prevent theinsolvent trading in the company. This section is applicable on the people who are appointed asthe director of the company and on those also who are not appointed as the director of thecompany but they acted as the director of the company. Taylormaid Marine Industries Pty Ltdv Beaurepaire & Ors is the appropriate case for understanding this fact. In this case, Courtstated that section 129 of the Act states that in some particular cases person who was acting asdirector can be considered as director of the company.

Law4This section states that director of the company is under obligation to prevent the organizationfrom incurring the debt if:When debt is incurred by the company, then at that time Company is already insolvent. Company becomes insolvent, if it incurred that debt or range of debts which include thatdebt also.When debt is incurred by the company, and sufficient reasons are present for suspectingthat the company is already insolvent or become insolvent. This section further set out the two categories of contravention, and these contraventions arestated below:If the director of the company fails to prevent the debt being incurred even though theyare aware that reasons are present which suspect the insolvency, then they are liableunder civil penalty provision. Second stage states that directors are liable for criminal offense if directors suspected thatsufficient reasons are present for believing that company is already insolvent or becomesinsolvent if company incurred debt, and director’s fails to prevent the company becauseof any dishonest reason (Corporation Act, 2001). Consequences of breach of Section 588G:Court can pass compensation order under section 588J and 1317H, and as per this orderdirector is personally liable to pay the compensation to the company. Amount of thecompensation is equal to the loss suffered by the company. Under section 1317G, court can make pecuniary penalty order of up to $200,000.

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