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ASIC v Plymin, Harrison and Elliot- Company Law

Question :

ASIC v Plymin is an Australian leading case in which the judges of the Supreme Court gave 14 indicators to determine whether a company is insolvent or not. This case helped the companies to understand insolvency, insolvent trading and the duties of directors to which they are bound. Insolvent trading is directly connected with the duties of director's as it is directors responsibility to save the company and stop trading when a company is insolvent.

  • Explain insolvent trading with reference to ASIC v Plymin
  • Whether the case of ASIC v Plymin helped companies in determining its insolvencies?
  • What main duty of a director is explained in the case of ASIC v Plymin?
Answer :

Background

ASIC v Plymin is a leading case of Australia in which a list was generated to help companies understand insolvency. The petition was filed by Australian Securities and Investments Commission (ASIC) against the three directors Plymin (managing director), Harrison (chairman of the board of directors) and Elliot (Non- Executive Director) of the company. The matter was related to the illegal insolvent trading by the two companies named as Water wheel Mills Pty Ltd and Water wheel Holdings limited. This case is famously known as “The Water Wheel Case”.

In this case, the directors knew the position of finances of the company. Initially, the business was earning profit but when the company decided to expand, the company's profit started to decline. Company somehow managed to get investors to invest money in their business knowing the fact that the company in not in a position to return it back to the investors. Even after knowing company's finances, director did not stop trading and continued their indulgence in wrongful trading. The companies were placed into voluntary administration and later ASIC started civil proceeding against the directors of the company.

Insolvent trading is defined under Section 588G of the corporation act of Australia. Insolvent trading generally takes place when directors of the company allows to continue trading with other companies. It is the duty of directors of the company to stop insolvent trading.

Insolvency is that state of a company in which they are not able to pay debts at the maturity. The directors of the company knew about the insolvency but still continue to take loans. The directors of the company breach their duties towards the company.

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Breach of Director's Duties is when the directors of the company are not acting with due care and diligence. They must always act in good faith and in the best interest, to achieve the common goals of the company. They shall not misuse their position as directors and must keep the secrecy required to be kept as a director. They should also keep an eye on all the records that are related to the financial position of the company and the most important is that the directors shall stop trading when the company is insolvent.

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Judgement

In the case law ASIC v Plymin, it was held by the Supreme court that the directors are responsible as they did not comply with their duties efficiently. Directors failed to perform their duties at the time when the company was insolvent, to prevent company from incurring debts. The court also held directors liable for contravening section 588G of the Corporation Act.

This was the first leading case in which, test to check the insolvency was given. The judges in this case gave 14 indicators of insolvency. These indicators were given to help the companies determine whether they are insolvent or not. This helped companies to know the financial status of an organisation and seek help accordingly from the experts. By early identification of insolvency, companies may get better recovery option without any delay. Out of 14 indicators given by the judges of supreme court, few of them are mentioned below:

  • A company is continuously in loss;
  • when liquidity ratio is below 1.0;
  • There are no alternative access available to the company of finances;
  • company do not have good relations with its existing bank and they are also not able to borrow any funds from the bank due to its inability to repay debts;
  • There is dishonour of cheques of the company;
  • when a company is not able to present its financial information or position of finances; etc.

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These are the few indicators given by the court. In the case of ASIC v Plymin, the court observed all the 14 indicators present. The company's finances were poor and no bank was interested in giving them loan for carrying out further business activities. The directors were also not helping company to revive and instead was indulged in insolvent trading and breaching their duties as directors. The directors and management of the company must always be careful and keep check on the insolvency indicators so to avoid any future problems.

Also Read: ASIC v Citigroup- Case Analysis

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