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d) the section allows for multiple actions to be taken against the directors
which may result in a race to bring the first action for fear that the assets
may be depleted if waiting until later.
Due to these problems the Law Commission suggested that some changes be
made to the insolvent trading provisions. Since previous legislation on insolvent
trading concentrates upon the incurring of a particular debt or debts, the new
provisions should focus on where the real abuse is, namely preventing trading
from continuing when the company is insolvent. 222 As a result of the
recommendations, section 588G was enacted: this imposes the duty on directors
to prevent insolvent trading when the company is insolvent. The next section will
explore the scope of section 588G in detail.
10.5.2 Insolvent Trading under Section 588G Corporations Act 2001
Despite recommendations made by the Law Commission on the difficulty of
interpretation of the wording such as „incurs a debt,‟ section 588G retains it.
Hence, cases under the previous section 556 will be used as references in
analysing the court‟s interpretation of the phrase. Under the insolvent trading
provision, the essential elements to be proven before directors can be held liable
are:
a) the company incurs a debt;
b) reasonable grounds for suspecting insolvency; and
c) the company is insolvent or has become insolvent as a consequence.
10.5.2.1 Incurs debts
The meaning of the word „debt‟ in this context has also created uncertainty
pertaining to whether or not it includes contingent debt. It has been resolved
nevertheless that debts within the meaning of the section only apply to liquidated
222 ALRC R45 Vol 1 1988 above n7 at [280]
280