Insolvent Trading Essay

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II. Insolvent Trading Purpose& Main content In order to encourage directors to act on insolvency earlier rather than later, the liquidator of a company will be empowered to make an application to the court to seek a declaration that the director is civilly liable for insolvent trading. The party is ‘person’(a director/shadow director) and companies of the company who failed to prevent the debt at the time the company is solvent and he/she knew or ought to have known that the company was insolvent. Advantages of insolvent trading provision (a) The introduction of insolvent trading provisions brings Hong Kong into line with other common law jurisdictions, which have established such provisions such as UK, US and Australia. (b) Introducing insolvent trading provisions may facilitate the liquidator to obtain more assets of the company for the benefit of distribution to the unsecured creditors in a winding-up. (c) It protects the interests of creditors dealing with a company, which is getting into difficulty and minimize damage to creditors. Because it attempts to stop the debt from being incurred and prevent further erosion of the distressed company’s assets to the detriment of creditors. Disadvantages of insolvent trading provision (1) As the provision would in effect serve as an incentive to introduce responsible person to initiate provisional supervision earlier, rather than resorting to insolvent trading before liquidation. Hence, it would deter directors from taking risk and would not be conducive to efficient business operation. (2) It might be too difficult for companies to be surviving under the relatively strict insolvent trading provisions in Hong Kong. (3) It might be unfair to directors who facing a relatively high risk when they try to make decisions for the benefit of the company to maintain its survival state. To some extent,

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