Insolvent Trading

Defences for Insolvent Trading

While difficult to prove, some of the defences available to insolvent trading claims include the following:

‘The director had a reasonable and actual expectation the company was solvent’:
‘The director relied upon a competent person’:
‘Illness or absence’:
‘The director took all reasonable steps to stop the insolvency’:

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‘The director had a reasonable and actual expectation the company was solvent’:

A court does not accept that the word 'expectation' equals 'hope'.
A director cannot claim he/she was not engaged in running the business, and so formed a reasonable and actual expectation the company was solvent, based on the information they’d seen
Under the Act, a director has a positive duty of diligence - or to ask the right questions.
Ultimately, a director must convince the court that a reasonable person in the same position would have formed a view the company was solvent. This defence rarely, if ever succeeds.

‘The director relied upon a competent person’:

To succeed in this defence, a director must show that it was reasonable for them to believe that a competent, reliable person was responsible for providing adequate information about the company's solvency.
Even here, the director still has the responsibility of providing the competent person with the information needed to make an appropriate assessment of the company’s solvency. If the director gives that person incorrect or inadequate information, the defence fails.
This defence is designed to protect directors in large companies where there are bulky accounts and a system of competent accountants, credit controls and financial management. In these instances, these people, provided they are competent and responsible, should report to the board any problems they may not pick up.
An example would be a case involving a management team given all the appropriate information, who then fraudulently hide the true position from the directors. Ultimately however, the longer the fraud is perpetrated, the more likely the courts are to hold the director to account.

‘Illness or absence’:

This defence can only be made in the narrowest of circumstances. However the Supreme Court of New South Wales has specified a core, irreducible requirement of involvement in the management of a company. In other words, a director has responsibilities that must be fulfilled.

‘The director took all reasonable steps to stop the insolvency’:

A director who takes all reasonable steps to stop the company from incurring a debt can also claim a defence. Notably, the legislation specifically requires the Court to consider the specific steps taken by the director to appoint an administrator.

Where a director becomes aware of insolvency and attempts to convince the company's board that the company should be placed into insolvent administration, they have a chance of making this defence.