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ASIC v Edwards Assignment PDF

   

Added on  2021-06-17

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ASIC v Edwards (No. 3) [2006] Case Introduction: The brief facts of this case are that a director was disqualified by the courtfor 10 years after the court discovered that there had been a breach of section 588G by suchdirector on many occasions. It was stated by Barrett J that it is possible for a party to fail to acthonestly without any subjective intention of deceiving the other by party. In this context, thecourt noted that there were at least six occasions when the director was aware that reasonablegrounds existed to suspect that the corporation had become insolvent. So the director allowed theinnocent creditor to move on the course of conduct that was certainly for the disadvantage of thedirector and it was beneficial for the personal interests of the director (ASIC v Vines, 2005]).Therefore such conduct was described by the court as being "not straightforward" and "morallywrong". The court also stated that the conduct had the elements of "moral terpitude". In this regard, a duty has been enforced on the directors by s588G, which provides that thedirectors ought to stop insolvent trading. When it is considered by the law that the corporation isa separate legal entity that can enter into a contract in its own right, it is also followed that thepersons behind the company, including the directors and shareholders of both missions, notpersonally liable regarding the debs of the Corporation. This principle has been firmlyestablished in the decision given Solomon's case and is followed even today (Rich v ASIC,2004). As a result of this basic concept is recognized by the law that there is a need for buildingthe duties of the directors and particularly the need for introducing the liability of the directors incase of the debts taken by the corporation under certain state of affairs (Commonwealth Bank ofAustralia v Friedrich, 1991). The conduct of the directors, while managing the affairs of the

Corporation, is governed by several duties that have been mentioned mainly in the CorporationsAct, 2001 (The Act). In this regard, a specific deity has been imposed on the villages by section588G. This duty requires the directors to stop the company from entering into a debt if thecorporation is insolvent. The consequences of the breach of duty that has been mentioned in thissection are as follows:Where the failure on the part of the directors to stop the company from incurring the debt wasdeceitful, a criminal offenses established by s588G(3). Therefore in such a case, as a result of thefunction of s1311 of the Act and schedule 3, a punishment can be given to the director in theform of conviction by penalty of 2000 units or imprisonment of five years or both;Where the director is established as liable for an offense under section 588G(3), it is available tothe court to order. The directive of the compensation to the company for any loss that may besuffered by the creditors on account of the breach of duty by the director (588K);A civil penalty provision is prescribed by section 3017E according to which the court may orderthat directed to pay pecuniary penalty. That may go up to $200,000 per charge on the applicationmade by the ASIC or the director may be ordered by the court to pay compensation for the lossor damage on an application made by ASIC or to the company where the liquidator hasintervened;A director can also be asked to pay compensation to the corporation on the applicationmade by a liquidator for violating section 588G(2) in accordance with s588M; andThe director can also be ordered by the court to pay compensation to the creditor on anapplication made by the editor in accordance with section 588R.

In this regard, it needs to be noted that section 588G is applicable if the person is a director of thecorporation at the pertinent time when a debt was taken by the company; and the company isinsolvent at the relevant time or has become insolvent after incurring such debt; and at therelevant time, reasonable grounds were present for the director to suspect that the company isinsolvent or may become insolvent; and the failure of the person to prevent the company fromincurring such debt can be considered as the contravention of this section if: the person is awarethat such grounds are present for suspecting so; or , any reasonable person would have been soaware holding similar position in the company and under similar circumstances. Therefore anoffense would be committed by the person if:The person is director of the company at the time of entering the debt;The company is insolvent at the relevant time or it may become insolvent after incurringthe debt;The person suspected at the relevant time that the company was insolvent or may becomeinsolvent due to incurring the debt; andThe person dishonestly failed to prevent the company from incurring such a debt. The duties/responsibilities breached: First of all, it has to establish that the person is thedirector of the company at the relevant time when the debt was incurred. However, generally thisis not the main issue. It needs to be mentioned that the term "director" has been defined insection 9 of the Act. It also includes the persons who have not been validly appointed by still

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