Jenny is the director of a company, Shipley Ltd, which is involved in building and construction. There are four other directors of this company. The company has been lending large sums of money to its parent company in China via an offshore subsidiary for more than two years. The directors have relied on letters of comfort from the parent company that the money will be repaid in due process. Of late, the building and construction industry is facing difficult times due to rising costs of materials which have to be imported from overseas. Shipley Ltd’s financial situation has become more serious and many creditors and subcontractors have not been paid. The parent company is continuing to make assurances that the it will repay the loans but the money has yet to appear in Shipley Ltd’s bank account. Jenny is very concerned as she believes that Shipley Ltd is no longer solvent and the company’s performance is very poor. The other directors brush Jenny’s concerns aside, saying that it is the norm for construction companies to trade insolvently.

When another request for payment to made to the offshore parent company is received – Jenny becomes very anxious and again voices her concerns to the other directors. However, the other directors ignore Jenny’s concerns and dispatch the money as requested.

Jenny comes to you for legal advice in regards to her legal position as a director in such circumstances. She wants to know:

1. Is there an obligation to cease trading when a company is insolvent? If there is not, what are the circumstances under which a company can continue to trade?

2. If a director allows a company to continue to trade indefinitely and the company is placed into liquidation, what are the potential liabilities for a director and how are these determined by the Courts?

Answer rating: 100% (QA)

1 there is no obligation to cease trading when a company is insolvent but insolvent companies should cease trading immediately or risk penalties inclu... View the full answer