Insolvent Trading in Australia: A Study of Court Judgments from 2004 to 2017

Abstract

The duty imposed on company directors under Australian law to not have the company of which they are a director trade while it is insolvent is controversial. The recent introduction of a safe harbour for directors’ personal liability for breach of the duty to prevent insolvent trading highlights the ongoing controversy surrounding this duty. This article presents the findings from a study of judgments of courts which considered the duty to prevent insolvent trading from 2004 to 2017. Directors were found liable in 72% of the judgments but the success rate differed significantly depending on who was the plaintiff. In cases brought by liquidators, the plaintiff was successful in 84% of the cases. In cases brought by creditors, the plaintiff was successful in only 42% of the cases. Almost 60% of compensation orders made against directors were for less than $500,000, but about one third of judgments involved compensation orders of over $1,000,000. The study also found there was no judgment in which a director successfully argued one of the statutory defences to an insolvent trading claim.

Keywords: insolvent trading; directors' duties; liquidation; insolvency