Business Law Assignment: Insolvent Trading and Director's Duties

This report examines the legal ramifications of insolvent trading, focusing on the case of Adriano Zumbo and his businesses. It begins with an introduction to insolvent trading, an unlawful offense under the Australian Corporations Act 2001, where directors can become personally liable for company debts. The analysis delves into the specifics of Zumbo's businesses entering voluntary administration while allegedly insolvent and incurring significant debts. The report highlights the duties of directors to prevent insolvent trading, the potential penalties for non-compliance, and the civil and criminal liabilities associated with such actions. It references relevant sections of the Corporations Act and emphasizes the importance of directors seeking professional advice and complying with ASIC's national insolvent trading program. The conclusion summarizes the key points, emphasizing the breach of the Corporations Act and the director's duties in the Zumbo case, providing a comprehensive overview of the legal and practical implications of insolvent trading in Australia.

Business Law Assignment

Introduction
The following report analyzes the case of insolvent trading. Recently an article was published in
the newspaper which provided information about insolvent trading practices adopted by Adriano
Zumbo since 2017 (Han, 2018). Insolvent trading is an unlawful offence and it may result in
directors becoming personally liable for the dents of a company.
Analysis
Insolvent trading is considered to be unlawful in the Australian Law under Corporations Act
2001 section 588G.
In the recently published newspaper reports it was highlighted that three businesses run by
Zumbo in Australia, including 611 Pty Ltd, I’m So Fancy Pty Ltd and Mel611 Pty Ltd, entered
into voluntary administration at the beginning of August 2018and continued to trade. There were
no releases from the side of the company justifying the reasons for entering into voluntary
administration. Later, it was revealed that the company had an outstanding debt of approximately
$10 million and was still trading in the market. Further, it was also mentioned in the reports that
the business did not have sufficient business working capital, since the year 2016 and was not
able to meet even the short term business obligations. This is a lawful offence under the
Corporation Act 588G. According to this Act the companies and the directors of the company
were banned from further trading as they will further incur debts for the company (Powell,
2018).
It is the duty of the directors to prevent the insolvent trading by the company. If the director of
the company fails to fulfill his duties after being aware of the factor that there are grounds of
predicting insolvency, the penalties ,may range up to $200,000. If the dishonest factors are

associated with the insolvent trading of the company, the directors may have to pay the penalties
as high as $220,000 and may even go to jail. Engagement of the directors in such a transaction of
insolvent trading attracts both criminal as well as civil liabilities. The civil liabilities of this act
are covered under section 1317E, where if the court declares the director guilty, the ASIC can
apply for penalties as per section 206C or can even ban the director from holding his position
back for a given tenure of time (Australian Institute of Company Directors, 2018).
In case of Adriano Zumbo, the director of the company as well as the company can be banned
from further trading or incurring further debt. Apart from this, if they are found to be guilty or
being engaged in any dishonesty practices, the penalties can be raised and the director may have
to spend time in the jail. However, the director of the company is hopeful of settling all the debts
in a time period of a month or two (Commonwealth Consolidated Acts, 2018).
Apart from this, the director can also be charged of breaching his duties as a director where he
was required to manage his company and prevent it from getting insolvent in spite of getting
warnings from various financial agencies. In this case, he is liable to be charged guilty under
civil penalty provision 1317E. This subsection considers all those people guilty who are either
officers or directors of the company at the tie when it is detected. ASIC can further disqualify the
director from managing the company ever or may ask the director to pay the sum of money to the
creditors equivalent to the losses incurred by them (Australian Government, 2013).
The director of the company could have sought the professional advice in such case where they
must have been advised to stop functioning in order to prevent the company from incurring
further debts. However, the company adopted the correct measure of getting into voluntary
administration and restructuring its affairs. The company could also have asked for financial
support from a few external parties. The best measure for the company would have been to stop

trading while insolvent, which it did not adopt (Australian Institute of Company Directors,
2018).
The directors of the companies in Australia must be aware of ASIC’s national insolvency trading
program (NITP) which allows the companies to deal with the possible insolvent trading before it
actually occurs. This approach involves the review of the companies to ensure the compliance by
the directors of insolvent trading and their duty of care under the section 180(1) (Australian
Institute of Company Directors, 2018).
Conclusion
The report highlights a case of insolvent trading where the director of the company continues to
trade even after the company became insolvent and was under debt of $10 million. This act can
be listed as the breach of the Corporation Act section 588G under Australian Law. The director
also breached his duties as a director.
References
Australian Government, 2013. Corporations Act 2001. [Online] Available at:
https://www.legislation.gov.au/Details/C2013C00605 [Accessed 19 October 2018].
Australian Institute of Company Directors, 2018. Insolvent trading:Duties of directors.
Australian Institute of Company Directors.
Commonwealth Consolidated Acts, 2018. Corporations Act 2001 - Sect 588G. [Online]
Available at: http://classic.austlii.edu.au/au/legis/cth/consol_act/ca2001172/s588g.html
[Accessed 19 October 2018].

Han, M., 2018. Adriano Zumbo may have traded while insolvent, say administrators. [Online]
Available at: https://www.afr.com/business/retail/adriano-zumbo-may-have-traded-while-
insolvent-say-administrators-20180821-h149yg [Accessed 19 October 2018].
Powell, D., 2018. Administrators report Adriano Zumbo’s business “may have been insolvent”
while still trading. [Online] Available at:
https://www.msn.com/en-au/money/company-news/administrators-report-adriano-zumbo
%E2%80%99s-business-%E2%80%9Cmay-have-been-insolvent%E2%80%9D-while-still-
trading/ar-BBMgKkR?li=AAgfLCP&%252525252525253Bocid=SL5MDHP [Accessed 19
October 2018].