Duty to prevent insolvent trading: it is the duty of directors to prevent the company from being insolvent. Section 588G of the corporation act provides that the duty comes into effect if the person was a director of the company when a debt was taken and the company has become insolvent by incurring that debt, also the director had reasons to believe that by incurring the debt company would become insolvent the director is said to breach his duty.The defenses available for the breach are provided in section 588H of the corporation act. The grounds of defense can be that the director had reasonable ground to expect that the company was solvent and will remain solvent after incurring the debt and he reasonably relied on the information provided by others or the director had taken reasonable steps to prevent taking the debt.The managing director of the company breached his duties under section 588G of the corporation act. As he was the managing director of the company when the debt was incurred and had reason to believe that such a huge debt shall not be repaid as the sales of the company were not going well. He also ignored the email from the financial controller about the financial condition of the company.
Conclusion: it is concluded that the managing director will be liable for his breach of duty under section 588G of the corporation act.
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