(a) Are there civil or penal/criminal sanctions in the legal system of this economy in relation to the incurring and non-payment of debts by corporate debtors (for example, some type of sanction - such as the concept of 'insolvent trading' - to which the directors of the corporate debtor may be subject)?

 

Yes.

(b) What are these sanctions?

 

In general, the directors of a solvent company owe no duties to its creditors. However, the law imposes a number of sanctions when a director in bad faith allows a company to incur debts. In general, these sanctions are available only when the company goes into liquidation.

Under section 339(3) of the Companies Act, an officer of a company in liquidation who was knowingly a party to the contracting of a debt when he had no reasonable or probable ground of expectation at the time of the company being able to pay the debt is guilty of an offence and is liable on conviction to a fine not exceeding $2,000 or to imprisonment for a term not exceeding 3 months. In addition, the officer may be declared to be personally responsible without limitation of liability for the payment of the whole or any part of the debt.

Under section 340 of the Companies Act, the Court can declare any person who was knowingly a party to the carrying on of business by that company with intent to defraud creditors personally responsible for all or any liabilities of a company. In addition such a person is guilty of a criminal offence and is liable on conviction to a fine not exceeding $15,000 or to imprisonment for a term not exceeding 7 years or both. This civil and criminal liability does not depend on the company being in liquidation. Furthermore, the power under this section is in addition to the power at common law to lift the corporate veil in cases of fraud.

Under section 406(a) of the Companies Act, any officer of a company who by deceitful or fraudulent or dishonest means induces any person to give credit to the company is guilty of an offence and is liable on conviction to a fine not exceeding $15,000 or to imprisonment for a term not exceeding 3 years or both. This civil and criminal liability does not depend on the company being in liquidation.

Further, if a person :-

(i) is or has been a director of a company which has at any time gone into liquidation (whether while he is a director or within 3 years of his ceasing to be a director) and was insolvent at that time; and

(ii) that person's conduct as director of that company either taken alone or taken together with his conduct as a director of any other company or companies makes him unfit to be a director of or in any way, whether directly or indirectly, be concerned in, or take part in, the management of a company;

the court may an order disqualifying that person from being a director or in any way, whether directly or indirectly, be concerned in, or take part in, the management of a company for a period of up to 5 years. The court may make the order upon the application of the Minister or the Official Receiver.

(c) Do any of these sanctions have the effect of encouraging the directors of a corporate debtor to seek protection for the corporate borrower under the insolvency law regime?

 

It is very hard to gauge the effect of these sanctions on directors' decision-making other than by anecdotal evidence. It is certainly the case that lawyers advising an insolvent company will normally advise the directors of their possible liability for insolvent trading provisions and the consequences of continuing to trade.

(d) Does the presence of the possible application of any of these sanctions create a problem if a corporate debtor which is in financial difficulty or insolvent seeks to negotiate an informal work out with creditors?

 

There is a difficulty in that the directors will almost certainly in negotiating with creditors have to reveal that the company is unable to pay its debts. There is then the danger that this fact will be used against the directors in subsequent proceedings for wrongful or insolvent trading. In practice, however, these provisions are rarely applied and the potential liability thereunder does not appear to figure significantly in the decision-making of directors with regard to approaching creditors.