Law & Practice

Introduction In this topic, we will try to find out about insolvent trading and how it is happened and while Company becomes insolvent what are the duties for directors in order to save unsecured creditors. We will also find out how directors become liable for their action in regard to insolvent trading and if they breach any law for insolvent trading what are the consequences they have to suffer and also law has given some defences for insolvent trading for directors in order to avoid penalty. S9 defines a director of a company- a person who is appointed to the position of a director or alternate director regardless of the name given to their position. Managing director is responsible for overall daily business. Non executive directors have part time involvement with the company. They participate board meeting or meeting of board committees. They monitor the activities of the management team bringing an independent view often an outside or broad perspective to the board’s deliberations. They consider the interest of the company and general body of shareholders.
Insolvent trading:
In order to answer the question of insolvent trading, we will find out when company becomes insolvent. Under s95A definition of insolvency is regarded when a Company unable to pay its debt when it becomes due. Usually Insolvency is not determined by looking at the balance sheet of a company and the surplus of assets over liabilities. It emphasises on cash-flow which is called “cash flow test”. Companies may experience both types of insolvency simultaneously. If we see the Powell V Fryer[2001] SASC 59, the Judge ruled that from Companies financial position, insolvency must be derived that it should not look only cash resource but also to money. In this case we found while company paid dividends and went into liquidation and became insolvent.
If a company has few assets to pay its creditors while the company became insolvent and this insolvent trading section helps to protect