THE CORPORATIONS LAW

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)  [Director when debt occurred]  

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 Part.

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 const-
                                  itution that provides for 
                                  the declaration of dividends,
                                  when the dividend is declared

 2    making a reduction of       when the reduction takes
      share capital to which      effect
      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)

 3    buying back shares (even    when the buy-back agreement is
      if the consideration is     entered into
      not a sum certain in
      money)

 4    redeeming redeemable         when the company exercises
      preference shares that       the option
      are redeemable at its
      option

 5    issuing redeemable           when the shares are issued
      preference shares that
      are redeemable otherwise
      than at its option

 6    financially assisting a      when the agreement to
      person to acquire shares     provide the assistance is
      (or units of shares) in      entered into or, if there
      itself or a holding          is no agreement, when
      company                      the assistance is provided

7     entering into an             when the transaction is
      uncommercial transaction     entered into
      (within the meaning of 
      section 588FB) other than
      one that a court orders, 
      or a prescribed agency 
      directs, the company to 
      enter 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)  [Debt offence]  

A person commits an offence if:

(a)  the person is a director of the company when it 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)  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(4)  [Pt 9.4B]  

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.