Most business people are aware of a director’s duty to prevent a company from trading that is, (incurring debts) whilst insolvent, and the liability that may arise to a company’s liquidator if that duty is breached pursuant to Section 588G of the Corporations Act 2001 (“the Act”).

However, ASIC has the right in certain circumstances to pursue directors for civil or criminal liability for insolvent trading.  ASIC’s rights also originate from section 588G of the Act.

SECT 588G of the Act states:

Director’s duty to prevent insolvent trading by company

(3) A person commits an offence if:

(a)    a company incurs a debt at a particular time; and

(aa) at that time, a person is a director of the company; and

(b)    the company is insolvent at that time, or becomes insolvent by incurring that debt, or by incurring at that time debts including that debt; and

(c)    the person suspected at the time when the company incurred the debt that the company was insolvent or would become insolvent as a result of incurring that debt or other debts (as in paragraph (1)(b)); and

(d)    the person’s failure to prevent the company incurring the debt was dishonest.

Only ASIC can commence a criminal prosecution of directors although these actions usually originate from a report from a liquidator.  A liquidator’s rights of action are limited to proceedings to recover money for the company by way of compensation from the director when section 588G has been breached.

The most common reason why liquidators do not take these actions is that often the directors have no money to satisfy any such claim.

Often by the time liquidators are appointed to an insolvent company there is nothing to recover from the directors.  It would be irresponsible for liquidators to spend money chasing a recovery action which will not lead to any recovery.

The difficulty with ASIC pursuing directors for civil or criminal liability is that the cost to ASIC in investigating the claim and the cost of the DPP’s time would be approximately $100,000.00 for each matter.

However this does not mean that directors will not be prosecuted.

Batten Sacks Harvey Bruce advise on insolvent trading issues, winding up companies that are insolvent and matters relating to Creditor’s Statutory Demands, Director Penalty Notices and Trade Debt Recovery.

Please note that the advice in this communication is general advice only and you should not rely on this advice unless you obtain legal advice specific to your own requirements.