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 resolved to enter into an unsecured agreement with an Indian engineering firm to acquire a new drill. They believed the new drill will improve efficiency at the mine and return it to profitability. Archy was away on holidays and did not attend the meeting.  ​

Have the directors (or any of them) breached their statutory duty to prevent insolvent trading by XY Mine?  ​

Answering this question involves 4 steps. They are:​

​

1. Does s 588G apply?​

2. If so, have the directors contravened s 588G(2)?​

3. Do any of the defences in s 588H apply?​

4. What remedies are available?​

Answer 1

An Insolvent organization is characterized as one which can't meet its budgetary commitments as and when they fall due or potentially when its liabilities overwhelm its advantages. In the event that the organization objects to income and the books are financially past due, UK law characterizes this as indebted exchanging.

Wiped out exchanging happens when an organization can't pay its obligations as and when they fall due and keeps on bringing about additional obligation. A chief must guarantee that an organization is dissolvable before bringing about extra obligation.

On the off chance that a chief breaks their legal obligation under the Act, the chief dangers being held actually subject to pay for the unpaid obligations if the organization later goes into liquidation.

The significant arrangements of the Act managing bankrupt exchanging are contained in areas 588G-Z and apply to all organization chiefs including shadow and true chiefs or any other chief that is selected and acts in that limit.

In outline, a chief will probably have penetrated the Act if:

the person is a chief at the time the organization acquires an obligation

the organization is bankrupt around then or gets indebted by causing that obligation or different obligations around then

there are sensible reason for expecting that the organization is, or will become, indebted

the chief knows, or should sensibly to know, that there are reason for anticipating indebtedness in the organization's conditions

the chief neglects to keep the organization from bringing about the obligation.

As per the accompanying arrangement Directors have penetrated their Statutory Duty and ought to be by and by at risk in the event of indebtedness.

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