Busn2101 week 6 (2)

BUSN2102 Directors' Duties- Duty to prevent insolvent trading

General law duties in relation to creditors- Looking at statutory duty to prevent insolvent trading. There's no equivalent general law duty for duty to prevent insolvent law trading. Courts have taken creditors duties into account when looking at duty owed to company as a whole (contrary to what she has said before) If company about to go into liquidation and hasn't gotten enough assets then who's going to be the ones looking at getting the company's assets when it's in liquidation? It's creditors

Kinsela v Russell Kinsela Pty Ltd (in liq) was a family run funeral directors business, company was in financial difficulty, insolvent and went into liquidiation. Before it did, board leased premises to two of the directors on 'uncommercial' terms (favourable to directors and not so to the company) It enabled directors to buy premises at a fixed price (no adjustment for inflation) and liquidator seeked to say directors had not acted in best interest of company. Court said when company in this position must consider interest of creditors. (1) this case has been getting on for 30 years old and there are provisions now in the legislation which didn't apply at that time- insolvent trading provision and voidable transaction provision

The duty is still one to the company as a whole but duty Is not OWED to the creditors but they must be considered. Creditors can't sue for breach of duty (don't have right of action) only the liquidator enforces duty directors owe to company and recover anything for the company

Statutory duty to prevent insolvent trading s588G This duty is only placed on directors (unlike duty of care). Does include s9 directors, shadow and de facto. s588G places a liability on directors that they may be personally liable for debts incurred. s588G is lifting the corporate veil and saying that 'we're recognising it's your decision that has incurred this debt, even though it's company's debt and we usually would sue company' FOR THERE TO BE A BREACH-director has to be director when company incurred debt-company was insolvent or became insolvent because debt incurred-at time debt was incurred there were reasonable grounds for suspecting insolvency-director was aware of those grounds or reasonable person in like position would have been aware

s588G applies when debt is incurred. s588G(1A) has things which indicate that debt has been incurred. If they decide to enter share buy-back that's deemed to be entering into debt. Contingent liabilities are incurred debts. If someone sues the company for negligence and may be successful against company. This does not include an obligation to pay unliquidated damages (not voluntarily incurred)

S588G applies in circumstances where director incurs debt on behalf of company where company is insolvent or would become insolvent.

Courts have also said you need to look a little deeper in some circumstances. QUestion of whether company could pay debts by some other means Fryer v Powell (2001) where temporary lack of liquidity does not automatically make a company insolvent. Should also look to the money it can procure from realisation of assets or whether it could borrow money

Presumption of insolvency S588E not presumption of insolvency but means you don't have to keep demonstrating that a company is insolvent, if you can prove that the company is insolvent at a particular time and from that point onwards (3) in (4) if company hasn't kept good records the presumption is that they are insolvent (just because liquidator can't prove insolvency from records it becomes directors problem)

Defences s588H- If a director can show that there were reasonable grounds to expect that the company was solvent, reasonable reliance defence where director has relied on someone to provide information about the company's solvency. 'absence from management due to illness or other GOOD reason' Also, director took reasonable steps to prevent incurring the debt. If director decides to appoint administrator under provision that would be reasonable step

ASIC v Plymin, Elliot and Harrison Harrison said he was liable so just action against Plymin and Elliot. Elliot was non executive director and Plymin was management direcot. Judge was satisfied that they were insolvent from 14 Sept. The factors which indicated that the company was insolvent were 1. company wasn't paying debts 2. delayed payment of debts 3. not making money 4. the bank said that they have defaulted and the bank will call it in by notice if they want to. Despite this, the board let the company continue. There were no reasonable grounds to expect company was insolvent. Elliot tried to say 'he couldn't have done anything' by being non executive director. Court said if they were to accept that then he should have resigned

Metropolitan Fire Systems Pty Ltd v Miller Raydar would do work for Ree and Miller was director of Raydar. Raydar arranged to sub contract some of the work and at the time had creditors requiring payment. Miller was liable for insolvent trading. Expectation of solvency requires something more than hope that debts can be repayed.

Consequences of contravention- Compensation- The company can be compensated. The court may order that company may be compensated which increases the pool or assets available to creditors. That creditor does not get all the benefit of the recovery, recovery goes to the benefit of the company generally. The right to bring action against the directors in relation to insolvent trading is a right that liquidator brings on behalf of company- creditors can't initiate proceedings. Primarily, the right belong s to a liquidator

Insolvent trading Breach of s588G is a civil penalty provision under Pt 9.4B 42.50If ASIC thinks it has sufficient evidence of dishonesty then it may take action against creditor for a criminal breach were the consequences are more serious. For criminal breach of 588G (3) Director can be imprisoned. Often it's easier and

Employee entitlements Under s596AB was introduced into the legislation. This says that if a person (director commonly) shouldn't enter into an agreement intending on prevent recovery of entitlements of employees or significantly reducing their entitlements. Patrick's Case power of union was sought to be broken. There was a group on companies where the employees were employed by one company. The company which employed employees sold its assets so no wages for employees (left in a vulnerable position). The company then went into voluntary administration. The company sought to dismiss all the employees with a view to then re-employing a non union workforce. There was an administrator in control of a company. Could an injunction be imposed on administrator to prevent them from dismissing employees

The other thing was that the parties settled and the government agreed to meet employee entitlements. If s 596AB had been enforced then would ensure employee entitlements were met. Government assistance to employees Things may have gone bad, company has lost money and not enough money to pay employee entitlements (if no ones fault0 then there's government gurantee to employees who are owed wages and other entitlements

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