By Michael QuinlanBy Michael Quinlan (www.findlaw.com.au)Section...

By Michael Quinlan
By Michael Quinlan (www.findlaw.com.au)

Section 588G of the Corporations Act (the Act) imposes liability on a director of a company who allows the company to incur a debt at a time when the company is insolvent where, at the time that the debt was incurred, there existed reasonable grounds for suspecting that the company was, or may become as a result of incurring the debt, insolvent. A director will be liable if at the time the debt was incurred he or she was actually aware of the existence of reasonable grounds to suspect insolvency or a reasonable person in a similar position within a similar company would have been so aware. A director will commit an offence (under s588G(3)) if at the time the debt was incurred the director actually suspected that the company was insolvent (or would become insolvent by incurring the debt) and the director’s failure to prevent the debt being incurred was dishonest. One of the main problems directors and liquidators face is being able to identify when a company is insolvent.

The somewhat vague definition of insolvency does not assist. Prior to 23 June 1993 no statutory definition of insolvency existed. The Act now contains section 95A which states that a person (including a company) is insolvent if they are not solvent.

A company is only solvent if it is able to pay all of its debts as and when they become due and payable. The emphasis is on the ability to discharge all of one’s debts, rather than merely particular debts.

Insolvency is not usually determined merely by looking at the balance sheet of a company and determining whether there is a surplus of assets over liabilities. Rather, the emphasis is on cash-flow.