CORPORATIONS ACT 2001

CHAPTER 5 - EXTERNAL ADMINISTRATION  

PART 5.7B - RECOVERING PROPERTY OR COMPENSATION FOR THE BENEFIT OF CREDITORS OF INSOLVENT COMPANY  

Division 3 - Director's duty to prevent insolvent trading  

SECTION 588G   DIRECTOR'S DUTY TO PREVENT INSOLVENT TRADING BY COMPANY  

588G(1)   [ Application]  

This section applies if:


(a) a person is a director of a company at the time when the company incurs a debt; and


(b) the company is insolvent at that time, or becomes insolvent by incurring that debt, or by incurring at that time debts including that debt; and


(c) at that time, there are reasonable grounds for suspecting that the company is insolvent, or would so become insolvent, as the case may be; and


(d) that time is at or after the commencement of this Act.

588G(1A)   [ When debt incurred]  

For the purposes of this section, if a company takes action set out in column 2 of the following table, it incurs a debt at the time set out in column 3.


When debts are incurred [ operative table]
Action of company When debt is incurred
1 paying a dividend when the dividend is paid or, if the company has a constitution that provides for the declaration of dividends, when the dividend is declared
2 making a reduction of share capital to which Division 1 of Part 2J.1 applies (other than a reduction that consists only of the cancellation of a share or shares for no consideration) when the reduction takes effect
3 buying back shares (even if the consideration is not a sum certain in money) when the buy-back agreement is entered into
4 redeeming redeemable preference shares that are redeemable at its option when the company exercises the option
5 issuing redeemable preference shares that are redeemable otherwise than at its option when the shares are issued
6 financially assisting a person to acquire shares (or units of shares) in itself or a holding company when the agreement to provide the assistance is entered into or, if there is no agreement, when the assistance is provided
7 entering into an uncommercial transaction (within the meaning of section 588FB) other than one that a court orders, or a prescribed agency directs, the company to enter into when the transaction is entered into

588G(2)   [ Failure to prevent incurring of debt]  

By failing to prevent the company from incurring the debt, the person contravenes this section if:


(a) the person is aware at that time that there are such grounds for so suspecting; or


(b) a reasonable person in a like position in a company in the company's circumstances would be so aware.

Note: This subsection is a civil penalty provision (see subsection 1317E(1) ).

588G(3)   [ Insolvent trading offence]  

A person commits an offence if:


(a) a company incurs a debt at a particular time; and


(aa) at that time, a person is a director of the company; and


(b) the company is insolvent at that time, or becomes insolvent by incurring that debt, or by incurring at that time debts including that debt; and


(c) the person suspected at the time when the company incurred the debt that the company was insolvent or would become insolvent as a result of incurring that debt or other debts (as in paragraph (1)(b)); and


(d) the person's failure to prevent the company incurring the debt was dishonest.

588G(3A)   [ Absolute liability offence]  

For the purposes of an offence based on subsection (3), absolute liability applies to paragraph (3)(a).

Note: For absolute liability , see section 6.2 of the Criminal Code .

588G(3B)   [ Strict liability offence]  

For the purposes of an offence based on subsection (3), strict liability applies to paragraphs (3)(aa) and (b).

Note: For strict liability , see section 6.1 of the Criminal Code .

588G(4)   [ Civil penalty provisions]  

The provisions of Division 4 of this Part are additional to, and do not derogate from, Part 9.4B as it applies in relation to a contravention of this section.


This information is provided by CCH Australia Limited Link opens in new window. View the disclaimer and notice of copyright.