Insolvency Trading Relevant Law

Question: Discuss about theInsolvency Tradingfor Relevant Law. Answer: Issue Jacob and Marie are accused of engaging in insolvency trade; which is against the 2001 Corporations Act. While analyzing this case, s588G and s588H will be relied on. This is because they identify the circumstances when a liquidator can bring a case against the directors of the company, accusing them of insolvency trading, and the possible defenses that the directors of the company can use to defend themselves. Therefore, in this case, Jacob and Marie have some grounds they can defend themselves, based on s588H of the Corporations Act. Relevant Law Section 588G of the 2001 Corporations Act provides identifies the obligations of the directors of a company towards avoiding insolvent trading[1]. Company directors may seek to trade within their companies despite being insolvent, with the belief that after a period of time, they will manage to transform the financial position of the company. The law requires financial directors to be fair in their financial dealings, and they must not incur debts when they are in the insolvency status. Through this position, the intention of the drafters of the corporation act was to protect creditors from unfair borrowing tactic that are used by the directors of the company. Furthermore, the directors of a company must act in good faith and not use their position for personal gain. For purposes of defending themselves, the directors of the company will rely on s588H. The law comprises of circumstances when the directors of the company can claim protection from the courts, against the application of s588G. s95A od the 2001 Act will provide information on the concept of solvency and insolvency. Application The directors of a company will breach s 588G of the company if the company incurs a debt at a time when the company was insolvent[2]. Furthermore, they will breach this section, if they are aware that the company is unable to pay their debts, but they are unable to prevent the company from acquiring debts. Additionally, an individual will be engaging in insolvency trading if they suspect that the company is insolvent or will become insolvent at the time of acquiring the debt. If the liquidator manages to proof these assertions, then he can successfully bring a case against Jacob and Marie. To understand the possible defenses that Jacob and Marie will have, there is a need of understanding this notion of solvency, in accordance to section 95 of the 2001 Corporations Act, and the criteria used in determining whether a company is solvent or not, in accordance to the various common law principles applied in Australia[3]. Section 95A (1) of the 2001 Corporations Act provides a definition of solvency. According to this act, a company is solvent when it has the ability to pay all its debts in a timely manner and when they are due. On the other hand, s 95A (2) denotes that when a company is not solvent, then it is classified as insolvent[4]. A company that is classified as insolvent does not have the capability of paying the debts that it owes to its creditors. Furthermore, in analyzing the capability of a business organization to pay its debts, the court will look at the position of the company on the day that the debt was incurred, and not at the time of paying the debt. Additionally, there are a number of conditions that an organization must meet for it to be declared insolvent. These conditions are established in the 2009 case of Sutherland v Hanson Construction Ltd[5]. Under this case law, it is the cash flow of the business organization that will determine the solvency status of an organization. However, it is important to note that the analysis of the balance sheet is not the only factor that can determine the insolvency of a business organization, in as much as it is an important factor to consider. This is a principle established in Sutherland v Eurolinx 2001 where the court made a ruling that reliance on the cash flow statement of a company cannot be used a single factor to determine the solvency of a business organization[6]. This is because companies that are solvent normally experience cash flow problems from time to time. Therefore, Jacob and Marie cannot successfully bring a defense on the solvency of their company based on the strengths of the organizations balance sheet. For instance, Jacob and Marie cannot claim that their company was solvent based on the fixed and non-fixed assets that were under their possession. However, the two can successfully carry out a defense if they can prove the conditions that are established in section 588H of the Corporations Act[7]. For instance, one of the possible defenses that Jacob and Marie can argue for is that they did not expect that the company would be insolvent at the time of incurring the debts. For instance, Jacob and Marie denote that Tania advised them that the company was solvent, and it had the capability of meeting its obligations and debts at the time the company was incurring the debts. The reason for this assertion is that the creditors of the company have been in agreement with the organization not to take any recovery process, only after they have issued a 30 day notice. Therefore, basing on the advice of their employee, Jacob and Marie were not suspicious of the insolvency status of their company. Additionally, s588H of the corporations act denotes that the directors of a company cannot be held liable for insolvent trading if they relied on the information from their subordinates, whom they believe that they are competent, reliable and responsible[8]. In the case of Jacob and Marie, Talia is their financial officer, and they employed her because of her competence, reliability and responsibility. Therefore, by relying on the information provided by Talia, the directors of the company can successfully bring a defense based on s588H of the 2001 Corporations Act. Conclusion Finally, while bringing a case against Jacob and Marie, the liquidator may denote that they engaged in insolvency trading, therefore breaching s588G of the 2001 Corporations Act. Some of the elements for a successful case against Jacob and Marie may include, if an individual is a director of the company, at the time the company was incurring debts and the company is insolvent. The liquidator must prove that there are reasonable grounds to believe that the company knew of the position of the company, but they failed to prevent the transaction. However, Jacob and Marie can argue that they were not suspicious of the insolvency status of the company, and they relied on the information from their subordinates while making a decision to engage in the trade. Bibliography Books, Journals and Articles Symon, Helen, Corporations Act 2001 (Leo Cussen Institute, 2006) Symes, Christopher Francis, The Justification And History Of Statutory Priorities In Australian Corporate Insolvency Law (2005) Case Laws and Statutes Corporations Act 2001 s95A Corporations Act 2001 s588G Corporations Act 2001 s588H Sutherland v Eurolinx (2001) 230 NSWSC (2001) Sutherland v Hanson Construction Materials Pty Ltd (2009) 232 NSWSC (2009) The New Corporations Act 2001 And Related Legislation (Butterworths, 2001)