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Insolvent trading
It is an offence for a director to allow a company to incur a debt when the company is insolvent if he or she is aware that there are reasonable grounds for suspecting insolvency or a reasonable person in his or her position would have been so aware. An offending director can be:
- • prosecuted or made subject to civil penalty orders under the CA; and
- • made civilly liable for the debt so incurred to the liquidator or, under certain conditions, to the relevant creditor.
In civil proceedings, it is a defence to prove:
- • that the director had reasonable grounds to expect that the company was solvent, including reliance on some other competent and qualified person;
- • that he or she did not take part in the management of the company at the relevant time for good reason such as illness; or
- • that he or she took all reasonable steps to prevent the company incurring the debt, including steps to appoint a voluntary administrator.
A creditor can only sue for its own benefit with the consent of the liquidator or with the leave of the court after request for consent has been sought and not given; and cannot sue after the liquidator has taken action with respect to the debt. Any amount recovered by the liquidator is available to unsecured creditors generally but a creditor who knew the company was insolvent at the time it suffered loss may be prevented by court order from participating in any recovery until all other unsecured creditors are paid in full. A secured creditor is postponed to all unsecured creditors.
See Insolvent trading.