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CORPORATIONS ACT 2001 No. 50, 2001 - SECT 588G

Director's duty to prevent insolvent trading by company

(1) This section applies if:

(a)
a person is a director of a company at the time when the company incurs a debt; and

(b)
the company is insolvent at that time, or becomes insolvent by incurring that debt, or by incurring at that time debts including that debt; and

(c)
at that time, there are reasonable grounds for suspecting that the company is insolvent, or would so become insolvent, as the case may be; and

(d)
that time is at or after the commencement of this Act.

(1A) For the purposes of this section, if a company takes action set out in column 2 of the following table, it incurs a debt at the time set out in column 3.

When debts are incurred [operative table]
Action of company When debt is incurred
1 paying a dividend when the dividend is paid or, if the company has a constitution that provides for the declaration of dividends, when the dividend is declared
2 making a reduction of share capital to which Division 1 of Part 2J.1 applies (other than a reduction that consists only of the cancellation of a share or shares for no consideration) when the reduction takes effect
3 buying back shares (even if the consideration is not a sum certain in money) when the buy-back agreement is entered into
4 redeeming redeemable preference shares that are redeemable at its option when the company exercises the option
5 issuing redeemable preference shares that are redeemable otherwise than at its option when the shares are issued
6 financially assisting a person to acquire shares (or units of shares) in itself or a holding company when the agreement to provide the assistance is entered into or, if there is no agreement, when the assistance is provided
7 entering into an uncommercial transaction (within the meaning of section 588FB) other than one that a court orders, or a prescribed agency directs, the company to enter into when the transaction is entered into

(2) By failing to prevent the company from incurring the debt, the person contravenes this section if:

(a)
the person is aware at that time that there are such grounds for so suspecting; or

(b)
a reasonable person in a like position in a company in the company's circumstances would be so aware.

Note: This subsection is a civil penalty provision (see subsection 1317E(1)).

(3) A person commits an offence if:

(a)
the person is a director of the company when it incurs a debt; and

(b)
the company is insolvent at that time, or becomes insolvent by incurring that debt, or by incurring at that time debts including that debt; and

(c)
the person suspected at the time when the company incurred the debt that the company was insolvent or would become insolvent as a result of incurring that debt or other debts (as in paragraph (1)(b)); and

(d)
the person's failure to prevent the company incurring the debt was dishonest.

(4) The provisions of Division 4 of this Part are additional to, and do not derogate from, Part 9.4B as it applies in relation to a contravention of this section.


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