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Under the Australian insolvent trading provision, directors incur personal liability
when “at that time, there are reasonable grounds for suspecting that the company
is insolvent, or would become insolvent.” 33 Courts‟ interpretation as to when debt
is incurred is essential in order to establish liability and the relevant time would
depend on the nature of the debt involved. 34 In construing the issue, there is one
principle which the courts have adhered to, namely whether the debt in question
was preventable and if so, at which stage could it have been avoided.
On matters relating to capital maintenance such as shares and dividends, the
statute provides a specific table as to when debts are incurred. 35 The setting will
assist the court in deciding whether the company is insolvent at the relevant time
in question. The court will then scrutinise the company‟s finances; whether the
company at the particular time was unable to pay off its debts, and if the answer
is in affirmative, the company is held to be insolvent. Hence, if the directors
incurred debts at the time or consequently the company becomes insolvent, the
directors will be liable.
10.2.5 Insolvency
Wrongful trading can only be invoked when the company has gone into insolvent
liquidation. Since the section is specific on insolvent liquidation, directors are not
liable if the company is wound up on any other grounds mentioned in Act. 36 In
addition, the pre-requisite of insolvent liquidation indicates that not all directors
will be caught up by this provision, only those who know or ought to have known
that liquidation was unavoidable are subjected to personal liability.
33 Section 588G(1)(c) of the Australian Corporations Act 2001.
34 See discussions and cases therein in Robert P. Austin and Ian M. Ramsay Ford’s Principles of
Corporations law (14 th ed, Lexis Nexis Butterworth, NSW, 2010) at [20.090].
35 See section 588G(1A) of the Australian Corporations Acts 2001.
36 For grounds of winding up see section 122 of the UK Insolvency Act 1986; section 218 of the
Malaysian Companies Act 1965; section 241(4) of the New Zealand Companies Act 1993 and
sections 461, 459A and 459B of the Australian Corporations Act 2001.
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