Insolvent Trading and Directors' Duties: A Comprehensive Case Study

This case study examines a scenario involving a director, Gino, and the company Sell my House Pty Ltd, which faced insolvency. The assignment analyzes the application of Section 588G of the Corporations Act 2001, focusing on the director's duty to prevent insolvent trading. It assesses whether Gino breached this duty by continuing business operations despite the company's financial distress. The study also explores the potential applicability of Section 588H, which provides defenses for directors. Specifically, the case considers Gino's illness and hospitalization as a factor influencing his awareness and involvement in the company's trading activities. The conclusion finds that Gino may be able to utilize the relief provided under section 588H due to his health condition at the time of the breach.

LAW CASE

Table of Contents
ISSUE:.............................................................................................................................................2
RULE:..............................................................................................................................................2
APPLICATION:..............................................................................................................................2
CONCLUSION:..............................................................................................................................3

ISSUE:
Is Gino under the breach of Directors duty for prevention of insolvent trading under section
588G of the corporation Act, 2001?
RULE:
Section 588G:
Corporation act state that, an individual is under the violation of responsibility to prevent
insolvent treading if:
 The person is company’s chief in case company is in debt; and
 The person is aware of the situation of bankruptcy at the time of incurring debt or have a
suspicion that with incurring a debt it can become insolvent or a reasonable person is in a
position of being aware of the situation.
Section 588H:
This section of the corporation act, 2001 provides defence to breach of the chief’s duty
regarding insolvency trading, if the person proves that;
 The person has a practical ground to trust that business was solvent at the time of
incurring loan or it would remain solvent; or
 The person has reasonable grounds of believe that a reliable and competent person of the
company have a responsibility related with providing information of company’s
solvancy; or
 The directors have not taken in the business activities in case debt was incurred due to
illness or some additional relevant reason; or
 Reasonable measures were taken to stop business from incurring such debt.
APPLICATION:
With application of the rules of section 588G, it can be stated that Gino was director of
the company Sell my House Pty Ltd when it becomes insolvent and also it continued trading
after 2 weeks off its insovlancy. The company Sell my House Pty Ltd had all reasons of
understanding its insolvency, yet it incurred debt in from of continuing the business for 2
months. Also, Gino was aware about the position of the company, being near insolvency and
he had reasonable grounds of suspecting the solvancy of the company Sell my House Pty

Ltd. This can be stated that he had an idea of that the solvancy condition of the organisation
was on the verge of getting insolvent.
With application of section 588H in the given case scenario it can be stated that Gino
who is a part of board director of Sell my House Pty Ltd can use the defence and relief
provided under this section. This is because Gino, was severely ill and was suffering from
malaria and having 40dgree of fever and being hospitalised when the other directors and
CFO continue trading of the company after being insolvent.
CONCLUSION:
With this it can be concluded that when the breach of director duty occurred Gin was
unaware of the complete insolvency of the Sell my House Pty Ltd as he was severely ill
and hospitalised. The relief can be utilised by Gino pertaining under section 588H of the
corporation act 2001.

REFERENCES
Books and Journals
Buscombe, I. (2019). Insolvent Trading and Fraudulent Trading in Australia: Regulation and
Context. The Journal of New Business Ideas & Trends. 17(1). 44-46.
Online
Director’s duty to prevent insolvent trading. 2019. [Online]. Available through:< http://mba-
lawyers.com.au/articles/directors-duty-prevent-insolvent-trading/>.