Question

Question 5

Tanked Pty Ltd (Tanked) has four directors who have been found guilty of insolvent trading under s 588G of the Corporations Act 2001 (Cth). Holly, one of the directors, believes she is not liable as she relied on a financial report prepared by the accounting intern that showed the financial situation of Tanked was good. Bob also believes he is not liable as he stood down from management some months earlier to assist his unwell wife. Richmond also believes he is not liable as he didn’t read the financial report from the Chief Financial Officer which showed Tanked was heading towards insolvency.

Advise Holly, Bob and Richmond as to what defences they might be able to raise to avoid liability for insolvent trading

Answer 1

Insolvent trading occurs when directors of an insolvent company allow it to continue to trade. A company is insolvent when it is unable to pay its debts. This section applies when if a person is a director of a company at the time when the company incurs a debt. The company is insolvent at that time or becomes insolvent by incurring that debt and at that time, there was reasonable ground for suspecting that the company is insolvent or would be insolvent.

Directors do not contravene this insolvent trading provision if they can establish one of the following specific defenses:

1. Reasonable grounds to expect, actual expectation, that the company was insolvent

2. Non participation in management due to illness or some other good reason

3. The taking all reasonable steps to prevent the company from incurring the debt.

Now as per question analysis of the above provisions and see that which director will be responsible and would not be liable.

Holly is one of the Director believes that she is not responsible because she is relied upon the Financial statement and in the financial statement the financial position is good. Now here director will be responsible because without director sign financial statements does not approve, so it is responsibility of Director that to see the financial position of company, cannot rely upon others. So holly ‘s reason is not sufficient

In question Bob believes that he was not in management due to the illness of his wife, and does not know about the financial position of the company. Now in the above reasons 2^nd can be referred, because of illness, or any other some good reason. Here his wife was ill, so that can be consider as good reason, so can be held not responsible.

In question Richmond also believes that he did not read the financial statement an does not aware about the financial statements so he think that he will not be held responsible. But it is duty of directors to see the financial statements and approve them, they cannot believe on others. So in this case Richmond will be held responsible.