Kearney & Oakley & Ors

In Kearney & Oakley & Ors, the Supreme Court of Victoria was asked to determine whether a company, Kearney & Oakley Pty Ltd, and its directors, Mr Oakley and Mr Kearney, had breached their directors' duties under the Corporations Act 2001 (Cth) by failing to prevent the company from incurring debts when it was insolvent. The dispute arose from allegations that the directors had allowed the company to continue trading and incur significant debts despite knowing, or ought to have known, that the company was insolvent.

The central legal issue before Forrest J was whether the directors had breached their statutory duty to prevent the company from incurring debts while insolvent, as stipulated by section 588G of the Corporations Act. This required the court to assess the state of the company's solvency at the relevant times and to determine whether the directors had reasonable grounds to believe the company was solvent, or that there were reasonable grounds to expect it would become solvent and that this expectation was reasonable.

Forrest J found that the directors had breached their duties under section 588G. His Honour's reasoning focused on the evidence presented regarding the company's financial position, including its cash flow problems, outstanding debts, and the lack of realistic prospects of securing further funding. The court applied the principles established in cases concerning directors' duties, emphasising that directors are expected to take reasonable steps to monitor the company's financial position and to act with due care and diligence. The evidence indicated that the directors had failed to adequately assess the company's solvency and had continued to incur debts without a reasonable basis for believing the company could meet its obligations.

Consequently, Forrest J made orders against the directors personally for the debts incurred by the company during the period of insolvency.