Article by Richard Mackenzie

The ASIC has on the 29th of July, 2010 issued a guide for directors concerning directors understanding and compliance with their duty under Section 588G of the Corporations Act 2001 to prevent insolvent trading.

The guide in summary sets out the insolvent trading provisions of the Corporations Act and goes on to deal with matters that Directors should take into account to avoid insolvent trading and concludes with factors that the ASIC considers in assessing whether a director has breached the Act and failed to comply with the provisions of Section 588 of the Corporations Law.

Click here to view the guide from the ASIC website

Section 588G requires a director of the company to prevent the company from incurring a debt if:-

The company is already insolvent at the time the debt is incurred; or
By incurring that debt or by incurring a range of debts including that debt, the company becomes insolvent.
And at the time of incurring the debt there are reasonable grounds for suspecting that the company is already insolvent, or would become insolvent by incurring the debt.

Section 588G(2) sets out two levels of contravention:-

Firstly a civil penalty provision applies to a director who fails to prevent the debt being incurred where they are aware that there are grounds for suspecting insolvency; or
Where a reasonable person in a similar position would suspect insolvency; and
Secondly Section 588G(3) sets out a criminal offence where:-
i.A director suspects that at the time the company incurs the debt that the company was insolvent or would become insolvent as a result of incurring that debt; and

ii.The directors failure to prevent the company incurring the debt was dishonest.