3. At that time, there are reasonable grounds for suspecting that the company is insolvent, or would so become insolvent.
S588G (1) (c) demands directors must take rational grounds to suspect that the company can not pay debts on schedule when the debt incurred. Stemmed from the case ASIC v Plymin [2003] VSC 123, ‘reasonable’ in this context demonstrates the standard of rationality appropriate to non-executive directors of logical competence and assiduity, seeking to carry out their duties as imposed by law and capable of reaching a reasonably informed opinion to guide and monitor the management of company. Taking the reasonable grounds into account, Jack, Susan and Sarah should take rational steps to suspect insolvency. In the light of the facts, Jack always took part in the board meetings and carried out his main function in regards to supervising the financial situation of company before he was diagnosed with a heart condition. Besides, when other directors enquired about the company’s financial performance, William always asserted that the company’s financial position was firm. As a result of this, the directors of Melbourne Pty Ltd have rational grounds to suspect that the company was insolvent when the debt was incurred.
Failure to prevent incurring of debt
Section 588G (2) demands evidence to prove that a director has inability to discourage the company from insolvency. In accordance to ASIC v Plymin [2003] VSC 123, the presentation “failing to prevent” includes inactivity or the failure to intend to stop the company from incurring the debt. Consequently, a director will breach s588G by failing to stop a company from incurring a debt if: s588G (2) (a) illustrates the directors is aware at that time that there are such grounds for so suspecting. The case ASIC v Plymin [2003] VSC 123 highlights that it is abundant if the director was realized of facts which would a moderately capable non-executive director to suspect that the company became insolvent at the time it incurred a debt.
Despite being fully aware of the company’s worsen financial performance, William always professed the company’s financial position is solid when other directors questioned about the company’s financial performance. Applying this s588G (2) (a) to the case of Melbourne Pty Ltd, William has already known other non-executive directors have reasonable grounds to suspect the company was insolvent when debts incurred. Therefore, it can prove that William is failure to stop incurring of debt. In other words, William breaches the duty to prevent insolvent trading.
Available defences to the directors
In brief, s588H outlines available defences for directors who despite appropriately carrying out their managed duties were incapable to discourage the debts that caused the company’s insolvency.
S588H (2): Reason grounds to expect company solvent
Under s588H (2), the defence of rational grounds to expect solvency implies more than prospect or probability that company will have solvency. It requires that the directors have rational reasons for being confident that the company is solvent. Moreover, the directors do not construct the s588H (2) defence by exhibiting that they did not absolutely know the company’s financial performance. In explaining one of the defences available to directors who would otherwise have breached s588G, Austin J pointed out in Tourprint International Pty Ltd v Bott[1999] NSWSC 581that Bott did not have rational grounds to expect that the company was solvent while debts were incurred because Bott did not learn about the accurate financial performance about the company either before being a director or when a director and he did not enquire the accountant or other directors and did not review the company’s financial statement.
However, when Susan and Sarah asked about the company’s financial statement, Will always stated that the company’s financial position was solid and he spread to other directors a favorable summary report. As the result of this report, Susan and Sarah had reasonable reasons to expect the company to be solvent. Thus, Susan and Sarah can rely on defence under according to s588H (2).
S588H (3): Information as to solvency from other person
The s588H (3) defence applied to a director who has represented the supervising the company’s financial performance to others on whom the director depends. The law stipulates that a director should build some requirements before being capable to depend on the depence in s588H (3). S588H (3) (a) shows the director must testify that when the debt was incurred and the director had rational reasons to trust that a capable and dependable person was conscientious for offering directors with sufficient information concerning to whether the company was solvent and the other person was carrying out that obligation. In the case ASIC v Plymin[2003] VSC 123, Elliott was a non-executive director of the company and he always depended on information concerning to the company’s financial performance supplied to him by its managing director, Plymin and the company’s management. Further, Elliott believed that Plymin and management were capable and reliable persons who were accomplishing the responsibility to provide him with abundant information about whether the company was solvent.
It held that by the court Plymin and the management were not competent and reliable persons because Plymin did not abide by board requirements for financial information. In addition, the court was not satisfied that Elliot, an expert businessman and an intelligent person, did not know he could have gained from management regular lists of debtors and creditors by age and amount, regular profit and loss and cash flow statements and reports.
Similarly, in the Melbourne Pty Ltd case, Susan is a non-executive director. Moreover, Susan as a skilled business woman should have regular management knowledge and experience. However, Susan was not involved in the running of the company and leaves the running of the company to William owning to her having other business interests. Furthermore, she trusts that if there is any problem in the company William will let her know. Despite being fully aware of the company’s deteriorating financial performance William does not inform the other directors. In addition, if others enquired the company’s financial position, William always stated that the company had better financial performance and distributed a favorable summary report to the board members. As the result of these facts, William did not regard as competent and reliable person as a managing director. Therefore, Susan and Sarah could not rely on this defence.
S588H (4): Director did not take part in management of company
The s588H (4) provides a defence for a director who was absent from management because of illness or ‘some other good reason’ did not join in the management of the company at the time when the company incurs the debt.
The case of Williams v Scholz[2007] QSC 266demonstrated that Scholz underlined that he was ill when the time the company traded and did not take part in its daily management. Nevertheless, Justice Chesterman could not rely on Scholz’s defence about ‘his absence from management owning to illnesses’ under s588H (4), the reason is that Scholz regularly attended directors meetings and sometimes travelled interstate.
However, it is adequate for Jack to allege that he was diagnosed with a heart condition and received treatment. Then Jack was unable to attend board meetings and no longer fulfill his function which was to supervise the financial situation of company. Applying this reasoning to Jack, he ought to be exempt from management due to the ‘illness’ defence in s 588H (4).
Subsequently, a director’s total dependence on their spousal director for management owning to their love, trust and confidence would not entitle reliance on the ‘some other good reason’ aspect of the defence in s588H (4). An illustration of the liability that can belong to a director who absent from management because of spousal relationship was decided in the case of Deputy Commissioner of Taxation v Clark [2003] NSWCA 91, the facts being that Mr. Clark and his wife were directors of the family company which conducted carpentry business and his wife did nor participate the daily management of company. The company incurred a debt while insolvent and Mr. Clark was found liable for insolvent trading. Mrs. Clark thought that she had good reason for being absent from management because she trusted to her husband, the managing director.
The court held that the legislative policy supporting s 588G was that a person should not being a director unless they were prepared to presume the duties of such an office and directors require necessary skills to monitor the management.
Similarly, Sarah is William’s wife and a non-executive director in Melbourne Pty Ltd. Furthermore, she never takes part in any company board meetings. Sarah always depends largely on William and never asks his management of the company because she relies on him absolutely concerning to all company affairs. So Sarah could not rely on defence under s588H (4).
Available penalties to the directors
Criminal penalty
According to s588 (3) (d), a person fails to stop the company from incurring the debt and was dishonest, he/she will conduct an offence. In Melbourne Pty Ltd, William did not tell the other directors in spite of being fully aware of the company’s worse financial performance. Besides, William asserted that the company’s financial position was firm and he distributed to a favorable financial report to members. Based on these facts, William was dishonest and failed to stop the company from causing the debt. However, the presumptions do not apply in relationship with criminal proceedings for breach of s588G. To prove the company’s whether insolvent or not in Melbourne Pty Ltd, s588E (4) has be applied. Therefore, William did not have criminal penalty.
Civil penalty
The s1317E (1) states the directors may receive civil penalty when contravene the duty to prevent insolvent trading. In particular, there are three categories of civil penalty orders to punish people. Firstly, a pecuniary penalty which more than $200,000 for breaches of the corporation civil penalty provisions: s1317G (1). Specifically, the financial services civil penalty provisions are $1 million for corporation bodies and $200,000 for individual. Therefore, the board of the Melbourne Pty Ltd may be involved in $1 million penalty and William, Susan and Sarah may receive $200,000 penalty. Secondly, the directors get a civil penalty that recusal from management under s206 C. William, Susan and Sarah did not fulfill their obligations as the directors of company, then they may be removed to management of the company. Finally, the court may order the director to pay compensation for damage which unsecured directors suffered in accordance with s1317H. William, Susan and Sarah may pay compensation to directors in order to make up the creditors’ damage. Besides, William should pay more than other directors.
Conclusion
By discussing the Melbourne Pty Ltd, no matter who is managing director or non-executive director, they have the duty to prevent the insolvent trading. They should utilize their managing knowledge and experience to guide and monitor the management of the company. For instance, William should be honest and try his best to manage the company as a managing director. Besides, Susan and Sarah should involve in the running of the company and they ought to play a significant role in supervising the company’s financial performance in order to avoid the insolvent trading.
Bibliography
Books and Journals
Australian Corporations Legislations, Butterworths, Australia, 2010
Austin, R.P. Ramsay, I. Ford’s Principles of Corporation Law, Butterworths, Australia, 14eh edition, 2010
Bsxt, R. and Fletcher, K.L. Fidman, S. Corporations and Associations Cases and Materials, Butterworths, Australia, 10th edition, 2008
Cassidy, J. Corporations Law Text and Essential Cases, Federation Press, 2nd edition Sydney 2005
Ciro, T. Symes, C. Corporations Law in Principle, LBC Thomson Reuters, 7th edition Sydney 2007
Harris, J. Hargoven, A. Adams, M. Australian Corporate law, LexisNexis Butterworths, 2nd edition ,2009
Harris, J. Butterworth Questions and Answers Corporations Law, LexisNexis, 3rd edition Sydney 2009
Lipton, P. Herzberg, A. Welsh, M. Understanding Company Law, Lawbook Co, 15th edition, Sydney 2010
Tomasic, R. Jackson, J. Woellner, R. Corporations Law in Australia, Federation Press, 2nd edition Sydney 2002
Tomasic, R. Jackson, J. Woellner, R. Corporation Law- Principles, Policy and Process, Butterworths, 3rd edition Sydney 2009
Cases:
ASIC v Plymin [2003] VSC 123
Deputy Commissioner of Taxation v Clark [2003] NSWCA 91
Kenna & Brown Pty Ltd v Kenna [1999] NSWSC 533
Powell v Fryer [2001] SASC 59
Tourprint International Pty Ltd v Bott [1999] NSWSC 581
Williams v Scholz [2007] QSC 266
P Lipton et al, Understanding company law( 15th ed, 2010) 22
Australian Corporations Legislations( 2010) section 588G(1) (a)
R Tomasic et al, Corporations Law in Australia ( 2nd ed, 2002) 379
Lipton, above n1, 261, 262
J Harris, Butterworths Questions and Answers Corporations Law（3rd ed,2009）106
Australian Corporations Legislations( 2010) section 588G(1) (b)
Australian Corporations Legislations( 2010) section 588G(1A)
Cassidy, J, Corporations Law Text and Essential Cases (2nd ed, 2005) 263
Australian Corporations Legislations( 2010) section 588G(1) (c)
J Harris et al, Australian Corporate Law (2nd ed, 2009) 542
Australian Corporations Legislations( 2010) section 588G(2) (a)
Australian Corporations Legislations( 2010) section 588H(2)
Australian Corporations Legislations( 2010) section 588H(3)
R Tomasic et al, Corporations Law- Principle, Policy and Process ( 4th ed, 2002) 523
Australian Corporations Legislations( 2010) section 588G(3) (d)
Lipton, above n1, 427 428
