Question

XY Mine Pty Ltd has four directors: Archy, Bruce and two nominees of QLD Ltd, the company that owns the other 50% of the issued shares in XY Mines. In 2019, the mine operated by XY Mine was hit by severe flooding and ceased production for several months. The chief operating officer of XY Mine sent a report to its directors explaining that there were cash flow difficulties, that copper prices were dropping, and that the prospects of XY Mine raising further capital by borrowing or further equity injections, were limited. However, he confesses that he has not been keeping appropriate financial records. At a board meeting attended by Bruce and the two QLD nominees, the directors resolve to enter into an unsecured agreement with an Indian engineering firm to acquire a new drill. They believe the new drill will improve efficiency at the mine and return it to profitability.   Archy is away on holidays and does not attend the meeting. Have the directors (or any of them) breached their statutory duty to prevent insolvent trading by XY Mine?

Answer 1

An Insolvent company is defined as one which is unable to meet its financial obligations as and when they fall due and/or when its liabilities outstrip its assets. If the company has a problem with cash flow and the books are in arrears, UK law defines this as insolvent trading.

Insolvent trading occurs when a company is unable to pay its debts as and when they fall due and continues to incur further debt. A director must ensure that a company is solvent prior to incurring additional debt.
If a director breaches his or her statutory duty under the Act, the director risks being held personally liable to pay compensation for the unpaid debts if the company later goes into liquidation.

The relevant provisions of the Act regulating insolvent trading are contained in sections 588G-Z and apply to all company directors including shadow and de facto directors or any alternate director that is appointed and acts in that capacity.
In summary, a director will likely have breached the Act if:

• he or she is a director at the time the company incurs a debt
• the company is insolvent at that time or becomes insolvent by incurring that debt or other debts at that time
• there are reasonable grounds for expecting that the company is, or will become, insolvent
• the director is aware, or ought reasonably to be aware, that there are grounds for expecting insolvency in the company’s circumstances
• the director fails to prevent the company from incurring the debt.

According to the following provision Directors have breached their Statutory Duty and should be personally liable in case of insolvency.