Insolvent trading by companies is a source of considerable attention and the regulator is actively investigating matters where allegations of insolvent trading are alleged.  Section 588G(3) concerns a director’s personal criminal liability if they fail in their duty to prevent insolvent trading by a company.

Under that provision, a person will commit the criminal offence if:

  • The company incurs a debt at a particular time;
  • At that time, the person is a director of the company;
  • The company is insolvent, becomes insolvent at that time because of debt;
  • The director suspected at the time that the company was insolvent or would become insolvent because of that debt or other debts;
  • The director’s failure to prevent the company incurring the debt was dishonest.

‘Dishonest’ is defined in the Act as according to the standards of ordinary people.[1] Defences in relation to reasonable grounds, illness or reasonable steps are applicable to the provision.[2]

This article considers the recent case of R v Young[3] where the director, Mr Young, was charged with a number of offences related to breaches of his director’s duties.

In R v Young, the appellant Mr Young was tried in the District Court on one count of fraud (s 408C Criminal Code (Qld)) and 18 counts of insolvent trading (s 588G(3) Corporations Act 2001 (Cth)). The charges arose from Mr Young’s involvement in companies associated with the Kleenmaid white goods business. Due to financial difficulties, the Kleenmaid group was ‘restructured’ around mid-2007 wherein the group was divided into the Corporate and Orchard Groups. The core business of Kleenmaid companies was to be conducted by the Corporate Group, which was largely EDIS and its subsidiaries. In November 2007, Westpac provided finance to EDIS totaling to $13 million. In 2009, the Kleenmaid group went into liquidation.

The fraud charge alleged that the appellant, with his brother and another, dishonestly gained a benefit for EDIS in November 2007. Specifically, this involved loan facilities from Westpac totaling to $13 million. The counts of insolvent trading involved debt/s incurred by EDIS between July 2008 and April 2009. The prosecution case was that the appellant acted dishonestly by concealing the nature of the intended ongoing relationship between EDIS (and its subsidiaries) and the Orchard Group; the two groups were not dealing with each other at an arms-length basis as portrayed to Westpac, leaving EDIS exposed to the precarious financial situation of the Orchard Group.

In this case, although defences were pursued, ultimately the Jury found beyond reasonable doubt that the director did fail in his duties and was dishonest in his dealings.

For businesses, it is important to remember that large companies whose umbrella incorporates subsidiary companies should develop strict policies and documented processes which can be used to argue reasonable grounds or reasonable steps were taken. If your company requires assistance with a regulatory investigation or you are concerned about your company’s response to a regulator, our corporate criminal defense advisors can assist.

[1] Corporations Act 2001 (Cth) s 9.

[2] Ibid s 588H.

[3] [2020] QCA 3.