Section 588G of the Corporations Act 2001 imposes
liability on a company director:
who allows a company to incur a debt when the company is
insolvent, or becomes insolvent by incurring the debt; and
who suspected at the time when the company incurred the debt
that the company was insolvent or would become insolvent as a
result of incurring that debt; and
whose failure to prevent the company from incurring the debt
was due to dishonesty.
The duty to prevent a company from insolvent trading not only
applies to persons who are formally or validly appointed as
director but also to persons who act in the position of director,
or in accordance with whose instructions or wishes the
company's directors are accustomed to act.
To meet the obligation to prevent insolvent trading, directors
must, amongst other things:
keep themselves informed about the company's financial
affairs and frequently assess the company's solvency and
investigate financial difficulties immediately if concerns
about the company's financial viability are raised;
seek appropriate professional advice to help address the
company's financial difficulties if such difficulties
consider and act appropriately on advice received, in a timely
KLEENMAID – A CASE STUDY
On February 12 of this year, almost three years after whitegoods
king Kleenmaid was placed in voluntary administration, ASIC has
launched legal action against the company's directors for
alleged insolvent trading and fraud.
The directors were charged with 18 counts of criminal insolvent
trading of debts totalling more than $4 million together with $13
million of fraud committed against Westpac Bank. Two directors have
also been charged with withdrawing $330,000 from the
company's bank accounts two days before it went into
Insolvent trading attracts a maximum penalty of five years'
jail and/or $200,000 fine. Whilst fraud carries a maximum penalty
of 12 years' jail.
ASIC's investigation focused on the solvency of the
company around March 2008, since it alleges the company continued
to trade despite becoming insolvent around this time.
The company was placed into voluntary administration in 2009
after it collapsed with approximately $100 million of debt owing to
creditors, including former employees, customers, suppliers and
We discuss whether certain clauses commonly found in ordinary commercial contracts could be considered to be penalties.
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