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10.5.2.6 Defences - section 588H
Section 588H provides four defences for directors to use once the elements
contained in sections 588G (1) and (2) are proven. These defences, however, are
not available in the case of criminal liability under section 588G (3) which
depends on dishonesty. They are:
a) Reasonable grounds to expect that the company is solvent;
b) Reliance on a competent and reliable person;
c) Absence from the management of the company due to illness or other
good reason; or
d) All reasonable steps to prevent incurring of debts have been taken.
10.5.2.6.1 Reasonable Grounds to Expect that the Company is
Solvent
It must be noted that for directors to be liable under the Act, it is sufficient for the
plaintiff to prove that the director „suspects‟ insolvency, but to be exonerated, the
directors must prove that there are reasonable grounds to expect that the company
is solvent. The requirement of expectation in order to exculpate directors refers to
a higher degree of certainty than suspecting. 250
A director must be able to prove to the satisfaction of the court that at the time the
debt was incurred he or she had reasonable grounds to expect that the company
was solvent. The court will apply an ordinary prudent director standard when
assessing whether it is reasonable to expect that the company would be able to
pay off its debts. The court will scrutinise the company‟s financial situation as a
whole, including assets, liabilities, potential revenue, creditor‟s promises for
250 Tourprint International Pty Ltd v Bott (1999) 32 ACSR 201; see also Dunn v Shapowloff
[1978] 3 ACLR 775 at 789-790; 3M Australia Pty Ltd v Kemish (1986) 10 ACLR 371.
286