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Insolvent Trading

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Executive Summary This research report documents the findings of an empirical study of judicial findings (of superior courts) relating to the duty to prevent insolvent trading. The duty to prevent insolvent trading is the most controversial of the duties imposed upon company directors. Those who support the duty argue that it provides appropriate protection for the unsecured creditors of companies. Those who oppose the duty argue that it has the effect of making directors unduly risk adverse which can result in directors too quickly putting companies into voluntary administration or liquidation for fear of personal liability (which may have a negative financial impact on unsecured creditors). Overview Key points …show more content…

Second, provisions such as section 588G may be deterring qualified people from becoming company directors and the provisions may be having this effect precisely in relation to those companies in financial difficulties which require the best possible expert assistance from directors. The major argument used to support the insolvent trading provisions is that they are necessary to protect the interests of creditors. As stated, insolvent trading provisions have generally ensured a conservative approach by directors when the company is experiencing financial difficulties. The potential alternative effects of such a decision are: 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 2. to avoid the company dwindling away assets and further reducing any return to creditors. 4 What to do if you suspect financial difficulty If you suspect your company is in financial difficulty, get proper accounting and legal advice as early as possible, as this increases the likelihood of the company surviving.  An insolvency practitioner can conduct a solvency review of your company and outline available options, these may include refinancing, restructuring or changing your company’s activities, or appointing an external administrator. The three most common forms of external administration are: 1. voluntary administration 2.

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