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01 Jul 2010

Relief from Insolvent Trading Liability

READ TIME

2 min

The Corporations Act imposed possibility of directors of insolvent companies being liable to the liquidator, or in some circumstances individual creditors, for debts incurred by the company while insolvent is a topic which we have addressed in e-Updates a number of times. Similarly we have looked at the defences available to such directors pursuant to the Act. The liability is a civil penalty provision.

What seems clear from the legislation dealing with insolvent trading damages and from the associated case law, is that in circumstances where insolvent trading has occurred, unless the directors’ circumstances squarely fit one or more of the available defences, it will be impossible to avoid liability.

For some time it has been felt by many that the legislation is too prescriptive in that it makes no allowance for circumstances where the director has acted honestly although perhaps mistakenly, and has acted in the perceived best interests of the company and its creditors.

Well, the Corporations Act does in fact provide for the court to grant relief from liability where, in all of the circumstances, it is fair that relief be granted. The potential for relief is provided for in section 1317S of the Act. This section has been part of the legislation since the early 1900 but has only infrequently been relied on.

The recent case of Hall v Poolman provides an example of the court applying a commercially sensible approach to circumstances in which the director would otherwise have been liable.

Not only can that section be applied when a liquidator actually sues for insolvent trading, it can also be used where the possibility of claim exists.

While section 1317S deals with relief from civil penalty provisions, section 1318 provides parallel relief from certain types of liabilities under general law.

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