The Corporations Act 2001: Assignment

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CORPORATE LAW
STUDENT DETAILS
ARASHDEEP SINGH ( K150802 )_
A company is considered insolvent under section 9 of the Corporations Act, 2001 (“Act”) occurs
when an individual is not solvent anymore i.e. the person is unable to pay the debts which have

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become payable. The company’s ability of paying its debts is related with the question of the the
ability of the company to pay the debts at the moment that they fall due. It would depend on the
legally binding agreement as to whether or not a debt has become due and payable (Kong v
Pilkington (Aust) Ltd, [1997]). In the case of Southern Cross Interiors Ptd Ltd (in liq) v Deputy
Commissioner of Taxation (2001) it was stated that whether or not a company is insolvent is a
question of fact and it is to based on considering the financial position of the company by
looking at the whole commercial reality to conclude whether there are sufficient resources that
the company has for meeting the liability that is falling short (Southern Cross Interiors Ptd Ltd
(in liq) v Deputy Commissioner of Taxation, [2001]). Some of the indicators of solvency are
losses that are continuous, alternative finances are not accessible, relationship with banks
are poor, unable to raise further capital in form of equity, taxes overdue, selected creditors
have special arrangements, and such other factors.
Under section 588G of the Act there is duty on the director to prevent insolvent trading
under section 588G(3) it is required that there must have been a debt that had been incurred, at
the time of the debt such individual was the director and due to the debt the company either
becomes insolvent or is insolvent (Redmond and Brennan, 2013). The person at the time when
the debt occurred was aware that the company was insolvent or would become insolvent.
There is a reasonable ground to be suspecting that there is insolvency section
588G(1)(c), it was opined in the case of Queensland Bacon Pty Ltd v Rees (1966) “Suspicion
that something exists is more than a mere idle wondering whether it exists or not; it is a positive
feeling of actual apprehension or mistrust, amounting to a slight opinion, but without sufficient
evidence... a reason to suspect that a fact exists is more than a reason to consider to look into the
possibility of its existence” (Queensland Bacon Pty Ltd v Rees, [1966]). It is not essential under
section 588G(2) that the director is aware of the insolvency of the company but there should be
reasonable grounds for suspecting such insolvency. There are five golden rules that are required
to be followed by the director. The first being that the Director should proactively avoid “head
in the sand” and should act in a manner that quick and early. The second being the monitoring
of the company’s financial position and if there is any financial difficulty that is being faced by
the company should increase and vigorous safeguards should be adopted by the directors.

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Third being that legal and financial advice should be sought by the board. Fourth being that
Banks and financial advisors should be engaged with the company’s financial situation. Fifth
being that Time is taken when it comes to restructuring and turnaround of the company.
If there is a breach of Director’s duty to prevent insolvent trading it would given rise to
civil penalty and Australian Securities and Investment Commission (“ASIC”) can seek
penalty once the declaration is made. Under section 588G(2) one or more of the following orders
may be given by the Court if it is found that the director is in breach of the civil penalty
provision. First being order for compensation under section 588 J and 1317 H an order may
be passed by the court making the director liable personally for the payment of compensation to
the company equal to the loss that was suffered by the company due to the failure of the director
to prevent insolvent trading. Second being that of order for pecuniary penalty under section
1317G of the Act there may be an Order passed by the Court that a director is required to pay to
the Commonwealth a pecuniary penalty up to $200,000 if in the opinion of the court there was a
failure on the part of the director to prevent insolvent trading is materially or serious prejudice to
the company’s interest or ability of the company to pay to the creditors (CoseNZa, 2002).
Finally the court may order for disqualification from managing a corporation under section
206C of the Act for a period of time which the court deems fit and justifiable.
The different avenues that are available to the Director or the Company if the company
goes insolvent are that of voluntary administration, receivership and liquidation. Voluntary
Administration is process which starts with the appointment for the company which is under
financial difficulty an administrator which investigates whether the creditors should enter into
Deed of Company Arrangement, have the company wind up or revert back to administration
normally (Dickfos and Anderson, 2008). It is not necessary for the company to be insolvent to