Australia: Insolvent trading claims – A cautionary tale for directors of corporations

Last Updated: 16 June 2012
Article by Kylie Hall

The law

Section 588G of the Corporations Act, 2001 (the Act) imposes a general obligation on company directors to prevent insolvent trading. In short, insolvent trading is said to occur in circumstances where, at the time the company incurs a debt, it is unable, or becomes unable, to pay its debts as and when they fall due.

Section 588M of the Act entitles a creditor who has suffered a loss as a result of a director contravening section 588G to seek to recover that loss from the responsible director. To satisfy a claim against a director for insolvent trading a creditor must prove:

  1. that they have suffered a loss because of the company's insolvency;
  2. that the debt was unsecured when the loss was suffered; and
  3. most importantly, that the company is being wound up. It is this final requirement which is the focus of this analysis.

On a literal interpretation of section 588M(1)(d), to be entitled to compensation a creditor must establish that the company which was the vehicle for the insolvent trading is being wound up. On its face, it would appear that this requirement is intended to refer to the status of the company at the time a proceeding is commenced by an aggrieved creditor. However, the decision of Barrett J in the Supreme Court of New South Wales in International Greetings UK Ltd v Stansfield [2010] NSWSC 1357 (International Greetings) set a precedent for the future interpretation of this section which is yet to be overruled or dealt with by amending legislation.

The facts

International Greetings centred around an insolvent trading claim against the directors of a company. Prior to judgment being delivered, but after the proceeding had been initiated, the liquidation of the company was finalised in accordance with the requirements of s.509 of the Act and the company was ultimately deregistered. The defendant directors submitted and Barret J held, that the plaintiff's right to recover under section 588M(3) was precluded because the company had been deregistered, and was non-existent, and was not being wound up as required by 588M(1)(d).

This finding lead to a decision by Barrett J, to dismiss the proceeding and to exclude the plaintiff creditor's right to seek compensation. His Honour held that "the words seem to me to be clear and unambiguous and I can see no basis on which their meaning can be affected by the practical considerations I have mentioned."

Overcoming the anomaly – reinstate the company

On a practical level, to prove all the elements of section 588M a plaintiff should request that the liquidator of the relevant company refrain from lodging the final company notice with ASIC pursuant to section 509 of the Act until after judgment has been handed down.

Whilst this statutory anomaly can be overcome by ensuring that the winding up process continues until judgment is handed down, a road block can be encountered in circumstances where deregistration of the company occurs prior to judgment being delivered or before proceedings are issued. This was an issue faced by one of our clients who is the plaintiff in a Section 588M claim. To overcome the problem, the solution for the plaintiff creditor is to make an application to reinstate the company pursuant to section 601AH of the Act.

Pursuant to section 601AH(5), the effect of reinstating a company is that the company is taken to have continued in existence as if it had not been deregistered. The pertinent issue to be considered is whether or not a company which has previously been wound up can be wound up again upon reinstatement or whether that process is finite and complete.

ACCC v ASIC [2000] NSWSC 316 involved an application by ASIC to reinstate a company which had been wound up and deregistered. Austin J held that even if the final account has been presented to ASIC by the liquidator pursuant to section 509 of the Act, an order by the court to reinstate the Company has the effect of countermanding ASIC's duty to deregister the company. His Honour went on to state that "the reinstatement must imply that the affairs of the reinstated company have not been fully wound up, even though the liquidator fully discharged the duties of winding up before the company was deregistered."

This reasoning has also been confirmed by Barrett J in Donmastry Pty Ltd v Albarran & Anor. [2004] NSWSC 632.

The cases above illustrate that by reinstating a company it is possible to satisfy section 588M(1)(d) even if the company has been deregistered or the winding up process is complete.

The lesson

Until the legislature takes steps to rectify section 588M(1)(d), when pursuing a claim against directors for insolvent trading it is crucial that the company which is the subject of the insolvent trading claim is in the process of being wound up until judgment is obtained. If the winding up process has not commenced or it has been completed in accordance with the requirements of section 509, plaintiffs face the risk of their claim being struck out or dismissed.

If deregistration has occurred prior to proceedings being issued or judgment being delivered then it is incumbent on the plaintiff to seek to reinstate the company pursuant to the relevant provisions of the Act.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Kylie Hall
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert
Email Address
Company Name
Password
Confirm Password
Mondaq Topics -- Select your Interests
Accounting and Audit
Anti-trust/Competition Law
Consumer Protection
Corporate/Commercial Law
Criminal Law
Employment and HR
Energy and Natural Resources
Environment
Family and Matrimonial
Finance and Banking
Food, Drugs, Healthcare, Life Sciences
Government, Public Sector
Immigration
Insolvency/Bankruptcy, Re-structuring
Insurance
Intellectual Property
International Law
Law Practice Management
Litigation, Mediation & Arbitration
Media, Telecoms, IT, Entertainment
Privacy
Real Estate and Construction
Strategy
Tax
Transport
Wealth Management
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.