North Sydney Commercial Lawyers

Director liability for uncommercial transactionsPrint This Post

Director liability for uncommercial transactions

According to the Explanatory Memorandum, the Corporations Law Amendment (Employee Entitlements) Act 2000 (Cth) amended s588G(1A) in order to “deem that a company incurs a debt for the purposes of the insolvent trading provisions when it enters into an uncommercial transaction.”

If a director contravenes the duty to prevent insolvent trading, then that director is exposed to either:

  • A proceeding brought by a liquidator under s588M of the Act for compensation; or
  • An application by ASIC for a civil penalty order under s1317E and with it a pecuniary penalty order or disqualification, in which case the court is empowered under s588J to also order than the director pay compensation.

In both cases, the compensation which may be ordered under ss588M or 588J to be paid by the transgressing director is equal to the loss or damage that the relevant creditor has suffered in relation to the debt which the director failed to prevent being incurred, thereby constituting a contravention of s588G.

But just who is the creditor for the deemed incurred debt where an uncommercial transaction takes place? The failure of s588G(1A) to deem a creditor for this particular transaction means that ss588M and 588J are ineffective in providing a compensatory remedy for a director’s contravention.

Given the objective of extending s588G (1A) to broaden the consequences for directors who are responsible for insolvent trading, some statutory refinement is required to ensure that the provision achieves its intended effect.

For example, Section 588G(1A) could be amended to deem a company’s creditors as a whole to be “the creditor” for the purposes of s588M(1)(b).