The paper ' Director's Duty to Take Into Account the Interests of Creditors' is a great example of a Business Assignment. The legal issue is whether Max can be held liable for engaging in insolvent trading. Is Max, the director of Shifty Sellers Pty Ltd, liable for entering into a credit arrangement with for the supply of steel cables from Smart Engineering Pty Ltd? The area of law is company law. Companies are separate entities with limited liability. Directors are appointed to manage the company operations and therefore they have the duty to act on behalf of the company.
One key duty of directors is to keep away from insolvent trading. Insolvent trading occurs when the director knows that or is expected to be aware that the debt the company has incurred or intends to incur cannot be paid and is not repaid. The Act specifies that the director ought to be held liable and should pay compensation totaling to the amount of that debt. Insolvency is defined under section 95A of the Corporations Act as to “ the inability of the company to pay all its debts, as and when they become due for payment” . In the case of Elliott v Australian Securities and Investments Commission , the court held that a director fails in their duty of avoiding insolvent trading "by not preventing" or "by failing to prevent" a company from incurring debt.
If there are “ reasonable grounds for suspecting that the company is insolvent” the court stated that the director will be deemed liable for debts incurred by the company. Therefore, no further proof is needed to indicate that the director did not perform their duty as required seeing as they could have prevented the company from incurring the debt. In this case, Max was aware that the company could not be able to pay its debt.
The situation here is that Max knew that the company was likely to become insolvent. However, he allowed the company to take goods from Smart Engineering Pty Ltd on credit. In conclusion, Max has a case for the unpaid debt to Shifty Sellers Pty Ltd. He failed to prevent the transaction from being effected and therefore should be held liable. The legal issue is whether Betty can be held liable for company debt.
Is Betty, the non-executive director of Smart Engineering Pty Ltd, liable for the repayment of the $500,000 debt to Eastpak Bank Ltd? The area of law is company law. Legally, a company is regarded as a separate legal entity. The company, therefore, owns its own assets and liabilities. It also has its own rights. The company directors can, however, be held personally liable for company debts. The debts for which the directors can be held liable emanate from several areas; key among them is insolvent trading.
Even though a company may not be insolvent at the time of taking the debt, there are several signs, such as declining profitability, loss-making and low cash reserves, which show that the company is disposed to become insolvent. Therefore directors are expected to assess the company’ s cash-flow and financial position so as to determine whether it is insolvent or not. The directors can be held liable if they engage in insolvent trading as outlined by section 588G of the Corporations Act.
Some of the factors that show that the company is insolvent are when the company issues cheques that are bounce back.
Anderson, (2006) ‘Creditors’ rights of recovery’ 30 Melb Uni LR 1
ASIC RG 217 Duty to prevent insolvent trading: Guide for directors
Daniels v AWA Ltd (1995) 16 ACSR 607 (AWA case)
CAMAC, (2006), Personal liability for corporate fault Report
Commonwealth Bank of Australia v Friedrich (1991) 5 ACSR 115
Elliott v Australian Securities and Investments Commission (2004) 10 VR 369; 22 ACLC 458; 48 ACSR 621
James, Ramsay and Siva (2004), “Insolvent Trading: an Empirical Study”
Keay, (2001), “Directors Duty to Take Into Account the Interests of Creditors” Melbourne University Law Review 11
Ramsay, I (2013, Corporate Governance & the Duties of Company Directors, CCH Australia
Statewide Tobacco Services Ltd v Morley (1990) 8 ACLC 827 at 831