Legal Actions Against Susan and Mary for Violation of Corporations Act

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Company Law

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Part (a)
Issue
The issue is what legal actions can be taken by the liquidator against Susan and Mary based
on their activities and chances of success?
Rule
The Corporations Act 2001 (Cth)1 (the Act) is the key legislation which governs the
companies operating in Australia. As per this act, a company becomes a separate legal entity
after its incorporation. Based on this right, the corporation has the right to hold property
under its name and sell property to third parties. Various rights and obligations are also
imposed on companies based on their actions. The company can sue third parties for violation
of contractual obligations, and third parties also have the right to sue the company for its
operations.2 The liabilities of a corporation cannot be imposed on its members, and they
cannot be held personally liable. This principle was recognised by the court in Salomon v
Salomon & Co Ltd3 case. It was ruled by the court that the shareholders cannot be held
personally liable for the debts of the company. However, this is not an absolute rule and
directors of a company can be held liable for violating the provisions given under the
Corporations Act. The obligations of directors may continue even after the corporation
ceased trading and has been deregistered. There are certain circumstances in which the
directors can be held liable for the company’s debts and other losses.
A good example is a liability which is imposed on directors if they incurred any debt when
the company is insolvent. This duty is recognised under section 588G of the Act. As per this
duty, the directors have to ensure that they avoid insolvent trading which means that they
must avoid trading when the company is insolvent and unable pay off its debts. In case the
director only suspects that the company will be insolvent based on their transactions, even
then they should avoid misusing their position to engage in any activities which could lead to
insolvency of the corporation. As per section 588G, there are four elements which must be
present to hold a person liable. The person must be acting as a director of the company while
the debt is incurred. The corporation must be insolvent at the time or by incurring the debt it
1 Corporations Act 2001 (Cth)
2 Jason R. Harris, Anil Hargovan, Michael Andrew Adams, Australian Corporate Law (6th ed., LexisNexis
Butterworths, 2017).
3 (1897) AC 22

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will become insolvent. There must be reasonable grounds available of suspecting the
company is insolvent or it is likely to become insolvent. This action must be taken after the
commencement of this Act. The liquidators have the right to hold the directors liable for
violation of section 588G at the time of liquidation of the company.
The judgement of Hall and Ors v Poolman and Ors4 case highlighted this liability. This case
was filed regarding the cause for concern regarding liquidators seeking to pursue directors of
liquidated companies for insolvent trading conduct by the directors of the company. This
claim was made in order to protect the right to preferential payment claims against unsecured
creditors in pursuant to liquidators who have entered into a litigation funding agreement.5 In
this case, the funds of the company were enough to fulfil the due payment of unsecured
creditors based on which the liquidators hold the directors liable to make such payments. The
court recognised the duty imposed directors based on the fact that insolvent trading is
considered as an actionable offense under the Corporations Act. Another example was given
in the ruling of Westpac Banking Corp v Bell Group Ltd (in liq)6 case. In this case, the court
provided that the directors of Bell Groups Ltd have violated section 588G by failing to
prevent insolvent trading in the company while engaging in transaction with the bank when
the company was almost insolvent. However, in this scenario, the bank had information
regarding the fact that Bell Groups Ltd is insolvent yet it involved in the transaction based on
which it committed equitable fraud.
Section 588G (2) provides that the person must be aware at the time and have grounds for
suspecting and a reasonable person in such situation will be aware regarding the fact that the
company has incurred a debt while being insolvent or likely to become, then a civil penalty
can be imposed under subsection 1317E (1). Moreover, defence against this provision is
recognised under section 588H of the Act. This section provides that the person must have
reasonable grounds to expect that the company is solvent at the time the debt is incurred at
the time. Moreover, subsection (3) provides that if the debt is incurred by a person who had
reasonable ground to believe that a competent and reliable person is responsible for providing
the information that the company is solvent and that the person has fulfilled his/her
responsibility, and he/she relied on the information provided by the first-mentioned person
regarding solvency of the company.
4 [2007] NSWSC 1330
5 Jason R. Harris, Anil Hargovan, Michael Andrew Adams, Australian Corporate Law (6th ed., LexisNexis
Butterworths, 2017).
6 [2014] HCATrans 75