Australian Insolvent Trading

According to the pro and contra Section 203D and 203E of the Corporations Act as above, most judges and scholars agree that the procedure of removal directors as stipulated in the Corporations Act provides fairness treatment for the directors who may be removed. However, they still strongly argue whether the Section 203D is mandatory or not. Moreover, they questioned the existence of Section 203E since it eliminates flexibility for companies to make decision particularly in the emergency situation as explained above. Therefore, in order to provide broader perspectives about the relevancy of Section 203D and Section 203E, it is necessary to compare the procedure of removal directors in the Australian legislation with the

1. to preclude the company from trading out of its temporary insolvency, thus resulting in creditors not being fully paid in respect of their debt; and

Now, the advantages of debt capital centre on its relative cost. Debt capital is usually cheaper than equity because, the pre-tax rate of interest is invariably lower than the return required by shareholders. This is due to the legal position of lenders who have a prior claim on the distribution of the company’s income and who in liquidation precede ordinary shareholders in the queue for the settlement of claims. Debt is usually secured on the firm’s assets, which can be sold to pay off lenders in the event of default, i.e. failure to pay interest and capital according to the pre-agreed schedule;

and, even if successful, such alternative actions may not allow us to meet our scheduled debt service obligations. In the absence of such operating results and resources, we could face substantial liquidity problems and might be required to dispose of material assets or operations to meet our debt service and other obligations. These restrictions may limit the ability to engage in acts that may be in company’s long-term best interests, and may make it difficult for the company to execute their business strategy successfully or effectively compete with companies that are not similarly restricted.

McHugh J at 282 held that the Australian law was correctly stated and applied in R Lowe Lippman (above). McHugh J also suggests that

A company is deemed to be insolvent by law if it cannot pay its financial obligations when they become due and payable.

Insolvency is generally understood, from a balance sheet perspective, as a financial condition such that the sum of the entity’s debts is greater than the fair value of a company’s assets. What deepening insolvency cases have also focused on, however, is cash flow insolvency—when a company incurs debt that would be beyond its ability to pay in future years—and low capital insolvency—when a company engages in a transaction or business that its capital base cannot support.

‘Lifting the corporate veil’ has been the topic of the legal arguments for many years. The corporate veil refers to a principle where a registered company has a separate personality from its shareholders. As a result, the shareholder was not liable for any liabilities that his company had obtained. However, in some severe circumstances, it is important that the separate identity must not be allowed to use as a protection to wrongful act. In some situation, the corporate veil can provide harmful effects to the third parties, especially the creditors. Therefore, the courts have to lift the corporate veil, which means to get rid of the shield protecting the personal assets of the shareholders from creditors of the company, and making them personally liable for the company’s debt.

Directors may be of three kinds: de jure directors, that is to say, those who have been validly appointed to the office; de facto directors, that is to say, directors who assume to act as directors without having been appointed validly or at all; and shadow directors who are persons with whose directions of instructions the directors of the company are accustomed to act (cite Re Hydrodam). De Jure directors are easy to recognize as they have officially been appointed as a director and there is no uncertainty that they are a director of the company. This is not the case with de facto and shadow directors. Although de facto and shadow directors appear mutually exclusive, there is some overlap and it can be a difficult task proving that a person is a de facto or a shadow director. As these persons may be liable for making negligent decisions in the management of the company it is important that the law is clear in identifying them. The Trinidad and Tobago Companies Act s.85 provides that “An act of a director or officer is valid notwithstanding any irregularity in his election or appointment, or any defect in his qualification.” It is not necessary for a director to be validly appointed for their actions to be valid therefore making their actions liable for any malfeasance perpetrated by their instruction. This essay is solely interested

Academics have made numerous propositions that would modify shareholders derivative suites by switching the balance more in the direction of accountability. The most impressive case is Professor Gevurtz suggestion to eradicate the business judgment rule . He analyzed the different formation methods that courts had established to the rule, his findings on the business judgment rule different explanation can be summarized in two classifications . He described the first class as “ meaningless” by considering that it alludes to directors walking free of the result of their decision except if there is a reason to hold them accountable, For instance, if they breach fiduciary duty or the duty of loyalty . He labeled the second class as “Misguided” because it creates a distinctive standard of accountability –gross negligence- for asserted breach of the obligation of care that vary from the usual tort law . The professor reached the conclusion that court should put the usual negligence standard into practice concerning directors’ action . He advised for the elimination of the business judgment rule, because it has a restricted effectiveness and high possibility for mischief .

Limited Liability- As described earlier, member of the incorporated bodies have limited or no liability for corporate debts. However, where personal guarantee has been provided by the company, director or directors did not perform the duty to avoid insolvent trading (s 588M), directors can be personally liable (Harris et al. 2011, p. 564). This is evident in Commonwealth Bank Ltd v Friedrich (1991). In case of partnership, partners are fully liable for the other partner’s actions and expose to a greater level of risk. According to Hanrahan et al., (2013, p. 99), limited liability is a privilege which enables the economic growth. This is the

The Insolvency and Bankruptcy Code, 2016 came into force in August 2016. It is believed that the acid test for the Insolvency and Bankruptcy Code 2016 would come when the case involving Kolkata based Nico Industries is adjudicated. The adjudication process signals whether a sick company can be shut down within 180 days of the case being registered. While more than 1000 applications have been filed, 100 of them have been admitted by the arbiter in the National Company Law Tribunal or NCLT that is expected to decide the fate of these non-financial firms within 180 days. That aside, one begs to examine the nitty-gritties of the Code itself.

The liability of shareholders will be limited in a company that is in the contrast to sole proprietorship and partnership, where their liability is unlimited. The liability of members is only limited to the amount that is agree to winding up, thus, they generally have no further liability to contribute when it is winding up

As long as a company takes the right precautions while in financial distress it will not go bankrupt and end up liquidating everything. This situation may arise because of the economy which is having an unfavorable effect on the company. Reducing or removing the risk of financial failure, which come from many things and leave firms in a hard spot, is an important

The company in less than one year ran into difficulties and liquidation proceedings commenced. The assets of the company were not even sufficient to discharge the debentures (held entirely by Solomon himself). And nothing was left for unsecured creditors. The liquidator