What penalties could await company body members in the event of bankruptcy?

The Corporations Act regulates several new bankruptcy offenses that could significantly affect company body members if the company goes bankrupt. The member could be obliged to surrender  any benefits gained under his/her service contract or other benefits that the member (not only a statutory body member) received from the company for the two years before the bankruptcy decision came into legal force (“Offense 1”) or he/she could be required to fulfill the company’s obligations (“Offense 2”). The purpose of the law is to prevent companies from going bankrupt and, in cases where it does (since in many cases bankruptcy cannot be prevented), to increase the proceeds from the insolvency proceedings by dipping into the member’s own pockets.

To be absolved of any accountability, members must prove that they acted in compliance with due managerial care and did all that was “necessary and reasonably expected” of them to avert bankruptcy. If you think that could be a difficult task, you are right. 

First of all, the conditions set forth by the law must be fulfilled. By definition the court must first issue a decision on the company’s bankruptcy. Subsequently, it must be proven that the body member knew or should or could have known that bankruptcy was imminent yet – as mentioned above – did not do all he or she could to avert it. In the case of Offense 1 the creditor must submit an insolvency petition and the insolvency administrator must request the member to surrender any benefits. In the case of Offense 2, however, who submitted the insolvency petition prior to the bankruptcy is immaterial: any creditor and even the insolvency administrator can submit the petition to the court.

If a company goes bankrupt, it can be assumed that either the insolvency administrator will ask that the benefits be surrendered or that the insolvency administrator or creditor will request a court decision requiring the statutory body member to fulfill the company’s obligations. As to the other conditions, the member should – assuming that due managerial care was undertaken – be aware that the bankruptcy was imminent. It is thus necessary to count on this condition being fulfilled a priori. Submitting a (preventative) debtor’s insolvency petition would only resolve Offense 1 but would not protect the member against Offense 2.

In conclusion, not only should company body members make every possible effort to help the company avert bankruptcy. We also recommend that they seek out high quality expert assistance when making further business and legal decisions and record each step they take in order to be able to prove their actions to an insolvency administrator, creditors and, in particular, a court and, where necessary, to demonstrate that they in fact did all that was necessary and reasonably expected.

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