Section 588G of the Corporations Act 2001 (Cth) (the Act) is a mechanism which prevents directors from continuing to trade the company (and incurring debts) when the company is insolvent and likely to be unable to pay its debts as and when they fall due.
There are a number of distinct elements which must be satisfied in order to prove that a director has contravened section 588G of the Act:
- The relevant person must have been a director of the company when the debt was incurred (which may also include de facto or shadow directors);
- The company must have been insolvent at the time when the debt was incurred, or became insolvent as a result of the debt being incurred by the company;
- There were reasonable grounds for suspecting that the company was insolvent or would become insolvent as a result of the debt being incurred;
- A reasonable person in a similar position in a company which is in the company’s circumstances would be aware of the company’s insolvency.
Section 588H of the Act provides four defences upon which directors can rely in refuting a claim for insolvent trading under section 588G:
- Expectation of solvency (section 588H(2));
- Reasonable reliance on another person (section 588H(3));
- Illness or some other good reason (section 588H(4));
- Reasonable steps taken (section 588H(5).
A range of documentation can be considered by the Liquidator as to whether there are sufficient grounds to be able to refute any defence which is sought to be relied upon – from minutes of meetings regarding the company’s financial position including creditor’s claims, payment arrangements with creditors, emails, correspondence with financiers, evidence from employees managing the company’s accounts, evidence from creditors who had dealings with the directors, medical records of the director and other necessary evidence to contradict the director’s reliance on a specific defence.
If the preparation is undertaken, you have the substantial evidence in your possession to attack any defences which may be relied upon by directors, you are able to satisfy the relevant elements under section 588G and you are satisfied that you have a claim, there are reasons for Liquidators to issue proceedings to pursue these claims.