A director of failed reinsurer New Cap has failed to get an
indemnity for a potential insolvent trading liability.
The Court held that the company's standard director
indemnity clause did not - and could not - cover a
director's personal liability for insolvent trading by
New Cap's liquidator was pursuing an insolvent
trading claim against Mr Williams under section 588G of the
Corporations Act. Section 588G makes a director
personally liable for debts incurred by his company while it is
insolvent, if the director has failed to prevent the incurring
of the debt. That personal liability will arise when a court,
on a liquidator's application, orders the director to
pay the company an amount equal to the debt.
New Cap's corporate constitution contained a fairly
standard indemnity clause. This indemnified its directors and
officers "against all cost losses and expenses which any
such Director, Manager, Secretary or other officer may properly
incur or become liable to pay by reason of any contract
properly entered into or other act or thing properly done by
him as such officer or in any way to the discharge of his
duties and it shall be the duty of the Directors to pay the
same out of the funds of the Company."
Mr Williams claimed that any potential liability under
section 588G was covered by this indemnity.
Contravention Of Section 588G Not "Acting
The Court held that accruing personal liability by allowing
one's company to incur an insolvent debt did not fall
within the terms of the indemnity, for two reasons:
not part of a director's duties - the
indemnity only covered things done by a director "in the
discharge of his duties". The Court said that
contravening section 588G was not part of a
not acting properly - the indemnity also referred to
things "properly" done by directors. The Court said
that a director who contravened section 588G was not acting
Even if New Cap's indemnity had been drafted to
cover insolvent trading liabilities, Mr Williams would not have
been able to rely upon it.
Section 199A(2) of the Corporations Act prohibits a
company from indemnifying its officers against liabilities owed
to the company.
The Court said that this would apply to a
liquidator's insolvent trading claim against Mr
Williams. Once an order was made against him:
"A liability will then and thereby be owed to [New Cap]
by Mr Williams since, in terms of the court's order, a
debt will be due to [New Cap]. There will thus exist, in
terms of s 199A(2)(a), a liability owed by Mr Williams to
[New Cap]. That being so, s 199A(2) will forbid any action by
[New Cap] to indemnify Mr Williams against that
The reason why insolvent trading is a bogeyman for directors
is that it is very hard to escape liability once the company
has incurred the debt. There are a limited number of defences,
but these are very difficult to establish.
In effect, therefore, insolvent trading is close to a strict
liability provision. The Court's decision in this case
reinforces that harsh economic reality.
Another aspect of the case worth noting is the ruling on the
effect of section 199A(2) - that directors' insolvent
trading liabilities are owed to the company.
Although the Court didn't refer to them, there have
been a number of decisions about the precise nature of monetary
recoveries by a liquidator. In dispute has been the issue of
whether that money is the company's or the
liquidator's. It has been argued that, if it's
the company's money, it should be caught by a floating
charge and hence payable to secured creditors.
More interesting, however, is the possibility of a private
insolvent trading claim. Although insolvent recovery actions
are primarily the province of liquidators, individual creditors
are allowed to pursue insolvent trading claims against
directors (with the liquidator's permission). In that
situation, the director is ordered to pay money directly to the
In such a situation, it is debatable whether section 199A(2)
would apply, since the director's liability would not
be "owed to the company".
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.
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This Update highlights two recent cases that considered circumstances where liens could take priority over a registered security interest.
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