Corporation Law Assignment: Insolvent Trading and Director Liability

This assignment solution addresses key aspects of corporation law, specifically focusing on insolvent trading risks and director liabilities. The solution begins by examining the defenses available to company directors under section 588H of the Corporations Act 2001 (Cth) in cases of insolvent trading, referencing relevant case law such as Kenna & Brown Pty Ltd v Kenna & ORS. The assignment then delves into the consequences of incurring debt and the failure to repay, as outlined in section 588G of the Corporations Act 2001 (Cth), including civil penalties and potential criminal offences. The solution highlights the liabilities of directors, particularly in scenarios where they are aware of a company's insolvency and continue to borrow money. The solution also includes relevant case law like Scott v Williams, and the assignment offers a comprehensive analysis of the legal framework surrounding corporate insolvency and director responsibilities.

Running head: CORPORATION LAW
CORPORATION LAW
Name of the Student
Name of the University
Author Note

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. 588H of the Corporations 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.
In Kenna & Brown Pty Ltd v Kenna & ORS, Supreme Court of New South Wales, 1999 it
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 provided U/s 588H of 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 to s. 588G (2) of the Corporations 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 him U/s 1317E of the Corporations Act 2001 (Cth). According
to subsection (3) of s.588G of the Corporations 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 the time 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 in Scott v Williams [2002] SASC 424 that a director who fails in
preventing company’s insolvent trading is to be partly relieved from the liability U/s
1317JA of the Corporations 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 liable U/s 588G (2) and 588G (3)
of the Corporations Act 2001 (Cth).

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