Legal Implications of Insolvent Trading in Australia

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Part A

The Duty of Directors to Prevent Insolvent Trading

Insolvency can be defined as the situation whereby a debtor lacks the ability to settle the debts that they have. This definition can also include situations in which companies have numerous liabilities, most of which are greater than the assets that they have (Adams 2002, 70). The type of insolvency that regards cash flow complications often incorporates the inability of firms to settle their debts whenever they are due. The other type of insolvency that regards the balance sheet incorporates net assets that reflect negative figures, thereby representing a scenario where liabilities are greater than assets. It is worth mentioning, that insolvency is not synonymous with bankruptcy. This is because bankruptcy is a form of insolvency that can only be enforced by the courts of law and requires that legal precepts are instituted with the intention of resolving the challenge of insolvency.

Company directors have a duty to prevent insolvent trading, due to the fact that they can be held accountable whenever losses arise and it is proven that they happened as a direct consequence of the wrongful trading acts. Under section 588G of the Australian legal code places the legal responsibility on all company directors who allow the companies that they preside over to incur debts at a time when they suspect or recognize that their company trades lack the ability to settle their debts partially or in totality (Adams 2002, 98). Foremost, it is important for all company directors to avoid complacency and an uncaring attitude. This is due to the fact that the pitfall of insolvency training will not be avoided if the directors do not take the initiative and enforce measures to prevent ...

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