Defences to insolvent trading actions
As a director you don't really want to have to worry about the legal defences to an Insolvent Trading action. If you are in doubt, it is far better to seek expert advice and avoid the possibility of an action being commenced. However, the law does understand that at times a director should not be held accountable even if a company did trade while insolvent.
The Corporations Act allows for the following defences to be made by a director:
- There were reasonable grounds to expect solvency;
- It was reasonable to rely on information from a competent and reliable manager;
- The director was not involved in management because of illness or for some other good reason;
- All reasonable steps were taken to prevent the company incurring the debt.
A director can't use these defences in criminal proceedings that are based on dishonesty.