Case Scenario: Jeremy owns a lot of land on which he maintains a timber yard. He has recently learnt that his timber business is likely to grow on account of the increased demand for timber as a result of the current global supply chain problems. To prepare for this growth Jeremy decides to form a company and to sell the land and timber to that company in exchange for shares.
In the meantime, Jeremy had insured the timber in his yard, but the policy was in his own name. He proceeds to form the new company "Timber Sales Pty Ltd" but he forgets to transfer the insurance policy to the new company. Timber Sales Pty Ltd is now the new owner of the land and the timber stocks and Jeremy is the only shareholder and director of the company.
Early this year there was a fire in the timber yard and the timber was completely destroyed. Jeremy intends to make a claim with the insurance company but has just remembered that the policy is still in his own name. As a result of the fire Timber Sales Pty Ltd is not able to fulfill its orders and soon is unable to pay its debts as and when they fall due. Jeremy is concerned about whether he is likely to be held personally liable for failing to honour the supply contracts that Timber Sales Pty Ltd entered with various builders now that the stocks of timber have been destroyed and the subsequent inability to pay debts that are due and payable.
Jeremy now seeks your advice.
Question: Explain to Jeremy the defences that may be available to directors who are found to have breached the insolvent trading provisions.