Director’s duty to prevent insolvent trading by company

Offence title:

Director’s duty to prevent insolvent trading by company

Act:

588G Corporations Act

Offence:

(1)   This section applies if:

(a)   A person is a director when the company incurs a debt; and

(b)   The company is insolvent, or becomes in solvent because of the debt, or a number of debts at the same time; and

(c)    At that time, the person had reason to believe the company is or will become, because of the debt(s), insolvent; and

(d)   That time is after the commencement of this Act.

(1A) The legislation sets out a table, not repeated here, of when a debt is incurred in some circumstances.

(2)   A person who fails to incur the debt contravenes this section, if:

(a)   The person is aware of grounds for suspecting insolvency; or

(b)   A reasonable person in a like position in the company in the company’s circumstances would be aware.

(3)   A person commits and offence if:

(a)   A company incurs a debt at a particular time; and

(aa)  At that time, the person is a director of that company; and

(b)   The company is insolvent, or becomes in solvent because of the debt, or a number of debts at the same time; and

(c)    At that time, the person had reason to believe the company is or will become, because of the debt(s), insolvent; and

(d)   he person’s failure to prevent the company incurring the debt was dishonest.

Penalty:

(3)   For an individual

·       5 years imprisonment, 2,000 penalty units, or both; and

For a body corporate

·       20,000 penalty units.

Summary/Indictable/mixed:

Mixed

Jurisdiction:

Local, District or Supreme Court

How committed:

A managing director, having read the profit and loss statement, is aware the company has no assets, but continues to order stock to try to trade out of the financial position, aware that the income will not be due before the payment required for the stock ordered.

Important note:

(3A) For the purposes of an offence based on subsection (3), absolute liability applies to paragraph (3)(a).

(3B) For the purposes of an offence based on subsection (3), strict liability applies to paragraphs (3)(aa) and (b).

(4)   The provisions of Division 4 of this Part are additional to, and do not derogate from, Part 9.4B as it applies in relation to a contravention of this section.