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Business entities-Australia’s Insolvent Trading Law

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Business entities-Australia’s Insolvent Trading Law

When a person or a business is in a position of financial distress where they cannot even pay their bills amicably due to financial strains. This could lead to legal actions being taken against a person or mostly an organization that has a lot of bills to cater for and to handle at any time. Australia’s insolvency state that in case a company is insolvent and the director or a certain director allows the company in the process to incur a new or a fresh debt, then the said director is the one responsible and is personally liable for any new and all the new debts incurred. Some of the effects that arise from the breach include disqualification, compensation, pecuniary penalty and much more under S588G of the Corporations Act of 2001.These insolvent trading laws should therefore not be abolished due to the fact that they are important in determining the distribution of the affected company’s assets among its said and current creditors. It’s the role in defining the position of companies that cannot fulfill their financial obligations, the role it plays in providing an amicable solution in cases where a certain company cannot pay its debts and it’s the role in protecting the company’s creditors and other parties that engage themselves with a company. According to the Australian insolvent trading laws, when an insolvent company is allowed by the director to incur any new or additional debt, then the director of the specific said company can be personally liable for any new debts incurred in their presence.

Relevance of Insolent Trading Law

Relevant legislation that governs insolvency trading law is the Australia is the Corporations Act of 2001. When considering the above legislation it is important not to abolish on the following grounds;

Firstly, these insolvency laws under the Corporations Act of 2001 seek and protect the creditors and all the third parties that are involved in dealing with these insolvent companies from any form of financial, economic, or any loss that may occur to the company innocently while dealing with the managers of these companies. This insolvency aims at providing and regulating the bankruptcy or the liquidation of the natural person, incorporated and any unincorporated bodies to enable any form of affairs to be evenly managed so as the creditors may benefit from the insolvency. (Goode & Hockaday, 2020)

Secondly, these insolvency laws under the Corporations Act of 2001 provide a solution in the cases where a company is unable to pay its debts, therefore proving amicable equitable treatment for all parties that are involved in the insolvency involved. Insolvency laws regulate the position of companies that are in financial distress and are unable to pay up for all their debts and other obligations. These laws also modulate and define the position of companies that are in destitution and are therefore unable to provide for their financial obligations. This law provides a guideline to company directors on what to do in case the company falls into insolvency. The solutions provided in the law enable recovery of the company and guide the director on when to risk and when not to risk in incurring a new and freshly acquired debt or to allow liquidation of the company a step which can allow the fair benefit of the company’s creditors. This law also provides guidelines to prove that a company is insolvent the steps that should be taken in case a company is purely and lawfully proven to be insolvent, how insolvency proceedings are done and who should be involved in these proceedings. If these Australian insolvent laws are abolished, then the conflict in between the creditors and the company will arise where the creditors will not be compensated. (Xynas & Xynas, 2021).

To add on these noted arguments, this insolvency law under the Corporations Act of 2001 also try to seek an equitable and amicable sense of balance between any of the competing interests of debtors and any of the creditors and the existing wider community and society in general in that when the tires are seemingly unable to meet the financial obligations set below. They ensure equitable distribution of the company’s assets among its creditors whilst considering the interests of the debtors. Once a company is unable to fulfill its financial duties and its directors breach the insolvent trade law, the law provides a solution concerning what happens to the creditors, how the amount outstanding debts are to be paid, and how if mini the creditors will distribute the assets among themselves. Further, the law also determines but the directors are liable for the unpaid company debts and taxes. This law states the penalties that befall directors if they break the law such as criminal charges and civil penalties. These insolvent trading laws are there for relevant as they prevent the company directors from incurring a new loan while insolvent. If this law is then abolished there will be no defined rule to guide the affected parties on the steps to take.( Wellard, 2021)

Fourthly, if a director, in any case, allows a new debt to be incurred clearly knowing that the said company is not able to pay those debts due to insolvency as and when they are due for payment, the director is also liable or may be guilty of trading insolvently. The director may incur severe penalties which may include disqualification from the management of a certain company and fines of less or up to $200,000 (Routledge, 2021).

Australia’s insolvency laws under the Corporations Act of 2001 also provide relief to honest companies in debt and are unable to pay back their debts through processes such as liquidation. Liquidation ensures that the company has recovered its assets by appointing a liquidator who then replaces the director. Liquidation of the company minimizes the company’s debt and thus enables the company staff to claim their unpaid salaries and thus the company can cancel any lease agreement set on or before the said date. Voluntary liquidation by the directors frees them from any legal action unless they are involved in any form of fraud, thus relieving them from their unexpected predicament.

On another note, Australia’s insolvent trading laws should not be abolished because of the fact that there is the provision of defenses in legal cases which are under the Corporations Act of 2001. For example under s588H(4) a defense of absence from management is rendered which must be a reasonable reason. An illustration of application is in the case of Deputy Commissioner of Taxation v Clark but the Court denied the reason on grounds of being a good reason because of the claim that the wife left management to the husband.

This ensures that there is a sense of fairness and that the directors are not oppressed during the legal proceedings in any way thus justice is served at its best-defined defense such as illness, whereby the director was not responsible for the management of the company at the time of the said illness and might have worked themselves out to ensure the company does not fall into such troubles at the time of their own well being. The appointment of an active administrator at a time after realizing that the said company or the specific falling company was insolvent and if the debt was incurred before the company was declared insolvent and might in the near future be declared bankrupt leading to official liquidation of the company. This defense provides a just and very fairground in defense of the director thus ensuring justice is promptly and durely served in accordance to the law and the virtues that a certain community or a said country or a company in a specific said are upholds and bases its morality on.

Case study

Mr. and Mrs. Patch find themselves in breach of the insolvency laws. When the two decide to start up a business and create room for employment of their son. This in turn results to a breach in insolvency trading law. Since the two are actually pensioners it has resulted to loss of three of their properties and their superannuation funds in order to sustain the company’s operations.

It can be observed that in this case, the bills of the company and taking care of the disabled son proved to be a hard task for the couple as their income could not meet their expenditure. The company could therefore be rendered bankrupt after some time. This is as a result of the family acting in breach of the insolvency trading act. (Goode,R & Hockaday, 2020)

According to the Corporations Act of 2001, particularly under the you are required to provide details of your current debts, the income of the company and the assets to your trustees. Your trustee is supposed to notify all your creditors of the bankruptcy thus to avoid them contacting you of your debt. In this case, the two sell their assets in order to sort out their debts as the trustee has the power to sell some of the assets in order to clear the debts of the company. The couple might have had long term plans on this company because it was their source of income thus, they got money to cater for their personal stuff and basic needs from the company (Xynas & Xynas, 2021)

Due to the insolvency of the company, the family has to go through a lot of challenges in order to survive physically and psychologically. It is hard for a family that has had a constant flow of income to survive on debts whereas they have a disabled son who needs more to be taken care of. The couple could device a method in which they will revive their business and start making profits before the business actually fails and they result to unnecessary struggles.


To conclude on the noted points, Australia’s insolvency laws should therefore not be abolished as they provide security to a company’s creditors that in case the company falls into bankruptcy, they can recover their debt and if possible, can apply for legal proceedings for a refund if the company incurred a loan while insolvent. This, therefore, concludes the fact that a manager is liable for any inconvenient debts caused through the insolvency act. It should be noted that insolvency is a whole different procedure to liquidation because when you liquidate a company, you legally end the company’s life but in insolvency, the company is just in a position of financial constraints which may end if the company devices proper methods of making proper profits, maintaining the profits and ensuring the stability of the firm in future days so as not to end up in the same situation as before.


Xynas, L., & Xynas, A. (2021). Insolvency and the Australian Safe Harbour Reforms of 2017–Do they Adequately Support all Australian Directors in Fulfilling their Role as a Fiduciary of their Company in 2021?. Australian Journal of Corporate Law36. Retrieved from: https://vuir.vu.edu.au/42439/3/FINALMay2021LXandAXInsolventTradingReformAust.pdf

Goode, R., & Hockaday, A. (2020). Liabilities on Insolvency. In Banks, Liability and Risk (pp. 165-173). Informa Law from Routledge.

Wellard, M. (2021). Submission to Treasury (Australian Government) on Insolvency reforms to support small business-subordinate legislation. Insolvency reforms to support small business–subordinate legislation. Retrieved from: https://opus.cloud.lib.uts.edu.au/bitstream/10453/149490/2/c2020-118203_wellard-mark%20%281%29.pdf

Routledge, J. (2021). Rethinking insolvency law amid the COVID-19 pandemic. Pacific Accounting Review. Retrieved from: https://www.emerald.com/insight/content/doi/10.1108/PAR-08-2020-0116/full/html

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