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additional capital, as well as a reasonable degree of confidence that company
would be able to trade out of difficulty. 251
It lays a burden on directors to be involved in the management and to acquire
reasonable information because failure to do so may expose them to liability. It is
essential for the court when interpreting the law to give effect to the underlying
principle, namely the duty to prevent insolvent trading in order to protect
creditors. As such, the end result of its decision should have the impact of
protecting creditors.
10.5.2.6.2 Reliance on Competent and Reliable Persons
A director can also raise a defence that he or she relied on third party
information, and, based on that information formed a reasonable expectation of
the company‟s solvency status. The section requiress a director to prove two
conditions, namely;
a) he or she has reasonable grounds to believe and did believe:
(i) a competent and reliable third person provides adequate
information on the company‟s solvency; and
(ii) that third person was fulfilling that responsibility; and
(b) Expected that, based on information supplied by the third person, the
company was solvent at the time debt was incurred and would remain
so even if the debt was incurred.
A third party who provides information to directors, however, will not be
subjected to liability, for insolvent trading provisions only applies to directors. A
director firstly needs to show that the third person is competent and reliable. A
competent person is judged on his or her skills and experience, as well as the
nature of business involved. A reliable person, on the other hand, refers to the
conduct or action he or she employs in applying those skills and experience.
Hence, a director has to demonstrate that the third person giving the information
251 Commonwealth Bank of Australia v Friedrich (1993) 11 ACSR 247.
287