Question

Tanked Pty Ltd (Tanked) has four directors who have been found guilty of insolvent trading under s 588G of the Corporations Act 2001 (Cth). Holly, one of the directors, believes she is not liable as she relied on a financial report prepared by the accounting intern that showed the financial situation of Tanked was good. Bob also believes he is not liable as he stood down from management some months earlier to assist his unwell wife. Richmond also believes he is not liable as he didn’t read the financial report from the Chief Financial Officer which showed Tanked was heading towards insolvency.

Advise Holly, Bob and Richmond as to what defences they might be able to raise to avoid liability for insolvent trading.

Answer 1

As per Section 588G of the Corporations Act 2001 (Cth), a director has 4 potential defences to a civil liability claim:

1. the director had reasonable grounds to expect solvency;
2. the director expected solvency relying on the advice of a competent and reliable person responsible for providing adequate information as to solvency;
3. the director did not take part in the management of the company because of illness or other good reason;
4. the director took steps to stop the debts from being incurred.

The director has the onus of proving the defences.

In the present case Holly expected solvency relying on the financial statement prepared by accounting intern hence she falls under point no 2 above.

Bob stood down from management some months earlier to assist his unwell wife hence he also falls under point no-3 above.

However, reason cited by Richmond does not fall under any category.