Corporate Law Assignment on Directors' Duties and Safe Harbour Defense

This Corporate Law Assignment discusses the duties of directors and the Safe Harbour Defense under section 588GA of the Corporations Act 2001. It also analyzes a case study on directors' breach of duties and the availability of the Safe Harbour Defense. The document type is an assignment and the type of assignment is a corporate law assignment. The subject is corporate law and the course code is BULAW5915. The course name and college/university are not mentioned.

Running Head: BUSINESS AND CORPORATION LAW 0
Corporate Law Assignment
5/20/2019
Student’s Name

BULAW5915 1
Contents
Part A...............................................................................................................................................2
Answer 1 2
Answer 2 2
Answer 3 3
Answer 4 4
Answer 5 4
Part 2................................................................................................................................................6
Answer 1 6
Answer 2 6
Answer 3 7
Answer 4 8
Answer 5 8
References......................................................................................................................................10

BULAW5915 2
Part A
Answer 1
Directors of the company are people responsible to take action on behalf of the same and
the same are answerable to members of the company for their conduct. They have certain duties
prescribed under common law as well under statutory law. Some of the duties are general in
nature and some of them are specific. One of such duty occurs when a company faces
insolvency. The duty is mentioned under section 588G of Corporations Act 2001 (Cth) (the act).
According to the provisions of this act, it becomes the liability of management of the company to
prevent trading when the company is in the position of insolvency (Iknow.cch.com.au, 2019).
This duty seems to be a fiduciary duty for many reasons. Fiduciary duty says that it becomes the
liability of directors to act with dignity and honesty and in good faith and interest of the
company. Here if the director would not stop insolvent trading then the situation will become
worse. Continues trading in a situation of insolvency cannot be treated as in the interest of the
company and therefore it is the fiduciary duty of the administration to prevent insolvent trading
as it is neither in the interest of the company nor is in good faith of the same.
Answer 2
As mentioned above, in normal circumstance, directors are liable when they do not
prevent insolvent trading but now the defense is available to them in such circumstances. The
defense is well known as Safe harbour defense and the same came into effect in September 2017.
The lead idea behind the development of this defense is to promote positive culture across the
organization. As per this defense, directors cannot be held liable even in cases of insolvent
trading when they take some actions that can bring positive outcomes for the company. It means

BULAW5915 3
when directors suspect about the insolvency then do some actions for the goodness of the
company then in such a situation, they may take it is a defense and can provide themselves a
safeguard against the proceedings of section 588G (Hwlebsworth.com.au, 2017). This defense is
mentioned under section 588GA of the act. As per this defense, directors cannot be held liable if
they take a reasonable course of action during insolvency that can provide better results to the
company (Mallon, 2017). Now the issue is to check whether an action causes goodness for the
company or not. Subsection 2 of section 588GA resolves this query. As per this section, action
will be treated as lead to goodness or better outcome if the director:-
 Properly inform themselves regarding the financial position of the company
 Take appropriate actions to stop misconduct by employees or officers of the company
that can affect debt repayment ability of the company
 Take a reasonable step to ensure that as per nature and size, the company maintain all the
financial records in a proper manner
 Develop a restructuring plan in order to ensure good changes in the financial position of
the company
 Seek advice from a qualified entity (Bryks & Rihak, 2018).
It means if a director conducts his/her activities considering above point then it will be
treated as that he/she taken a step ahead to lead better outcomes and can be safe from the
liabilities mentioned under section 588G (2).
Answer 3
Section 588GA is applicable to all those directors that hold the respective position in an
insolvent company, has a reasonable suspect of insolvency and do some transaction on behalf of

BULAW5915 4
the company during its insolvency period. The defense is closely connected to the provisions of
section 180 (2) of the act where it is provided that directors may make a business judgm ent
when they feel that doing so is in good faith of the company (Smith & Gold, 2018). Safe harbour
defense is only available when the directors have required a belief that their actions can bring
better outcomes for the company. In this manner, the discussed defense seems to be fit with the
general duties of directors mentioned under section 180 (2) of the act. In order to conclude the
question asked hereby this is to state that the defense under section 588GA is similar to business
judgment rule mentioned under section 180(2) because undertaking a course of action is also a
business judgment, nevertheless defense is specifically related to cases of insolvent trading
(Mallesons & Mallesons, 2018).
Answer 4
Certain restrictions are there on the availability of the defense U/S 588GA of the act.
Firstly if the time of incurring the debt, the company was in the failure to pay employee
entitlements or to present returns or other documents as per taxation law, and such failure has
been made during 12 months ending when the debt is incurred then such defense is not available
(Marcar & Renfrey, 2017). Secondly, if the director fails to fulfills the requirements mentioned
under subsection 475(1), 497(4) or 530A(1) or para 429(2)(b) after the debt incurred then also
director will not be able to take section 588GA defense. Nevertheless, if the court thinks that
such failure was a result of some exceptional situations, then the same can allowed the defense
even in the presence of the above failure (Bryks.com.au, 2018).
Answer 5

BULAW5915 5
Division 3 of Part 5.7B of the act consist of the provisions related to responsibilities of
directors in respect to prevention of insolvent trading. Recently the changes have been made in
this division by introducing Section 588GA that provides a new defense to directors where they
can proceed with the course of action that is reasonably to lead better results to the company. The
defense has its huge significance as it made the working of directors easy and provided them
enough flexibility to conduct the business activities when their intention is fair enough. Before
the introduction of this defense, directors had no other options in case of insolvency of the
company than to apply voluntary insolvency. Voluntary insolvency is a situation whereby a
company declares itself as insolvents, show up its inability to pay the debts and need help to
come out of this situation. The company generally do so when the same faces inability in making
payment of debts. Before safe harbour, directors of the company could not do so anything as they
were restricted under section 588G of the act. Sometimes, they got good opportunities using
which they could turn their company into solvent but as they were highly restricted by doing so,
they had to ask for voluntary insolvency. But now the situation is different. As per new defense,
directors can provide safeguards to their companies if they come across good opportunities.
Directors that behave responsibly and in a fair manner are the people who are highly benefited
out of this defense as the same understand their genuineness. Companies are not obliged to
declare voluntary insolvency as long as actions of directors can prevent this situation.
Part 2
Answer 1
As mentioned above certain duties of directors are prescribed under the act. These consist
of general and non-general duties. In order to discuss them, this is to state that it becomes the

BULAW5915 6
duty of directors including an officer of the company is responsible to perform carefully in a
diligent manner. Further, the sections say that while deciding any matter on behalf of the
company, such people have enough belief that the same is in good faith for the business of the
company, is appropriate and reasonable and their personal interest is not included in the same.
Further section 181 says that there must be a proper purpose and best interest of the company
behind the conduct of directors and officers (Australia, 2011). Here in the given case, Mr. Daly
had these duties as he was appointed on the position of director of the company but duties seem
to be breached. His conduct was neither appropriate nor in the best interest of the company. No
care and diligence reflect out of his conduct. He took the business fund for his personal uses
where the company had other outstanding liabilities to pay. In this manner, his both of the above-
mentioned duties have been breached by Mr. Peter Daly. Further section 182 is the most relevant
section for the purpose of this case. The section limits the power of directors and officers
whenever they use their managerial position for personal benefit (Lawhandbook.sa.gov.au,
2019). In the case presented hereby, Mr. Daly borrowed money of client of the company
(investment fund) to overcome his financial difficulties i.e. to arrange his daughter’s wedding. In
this manner, Mr. Daly also breached this section.
Answer 2
Yes, Mr. Daly was not the only director of the company who was acting going outside of
his powers or may say breaching duties of directors but others were also there. The other director
was facing disputes with his ex-wife and was in financial difficulty because of the same
(Christodoulou , 2018). He requested money from the company and mentioned in the request
letter that he had many costs associated with him such as dispute cost and caring cost of his old
sick mother. The other two directors approved his request and grant him money out of the fund

BULAW5915 7
of the company. Further, the two directors apart from Mr. Daly were also responsible to approve
the request of Mr. Daly where he demanded fund for his daughter’s wedding. In this manner,
three directors supported each other in unethical acts where two of them were using the
company’s fund for their personal purposes. In this manner business judgment made by other
directors was also not appropriate. They have breached section 180 and 181 of the act. Further
care and diligence were missing from the behavior of three directors and at last two of the
directors used their position for their personal benefit and one of the fellow directors used his
position to create personal benefits for them and in this manner breached section 182 of the act.
Answer 3
In the provided podcast many of the times, it has been reelected that the company was
insolvent and yet the same was trading. Firstly, the company was not able to pay money to its
investors if when the same has been due. Investors were denied by withdrawing their money
when they want to. Registered fund of the company did not consist of enough amount. Directors
had very fewer entitlements of salary, yet the company was not able to pay remuneration to its
directors. Further, directors of the company were also facing financial difficulties. Although it
was their personal issues yet it shows that the company was not doing well. It had outstanding
liabilities and yet the same continuously working.
Answer 4
For the purpose of section 588G, three requirements are needed to fulfill or in other
words to say that director can only be responsible under this section if these three conditions are
satisfied. The first condition is that the person must hold the position of director in the
corporation at the events of occurrence of the subjective debt (Austlii.edu.au, 2019). Further, at
the time of generating the debt, the entity (company) must be insolvent or expected to be

BULAW5915 8
insolvent because of the respective debt and the last condition is that the director must be aware
of insolvent status or poor financial condition of the company or there must be enough reasons to
investigate the same (Rodgersreidy.com.au, 2017). If all such conditions are fulfilled and yet the
company performs business transactions or trading, then the director held responsible for
insolvent trading under the mentioned section i.e. 588G. It means if directors would prove that
they had reasonable grounds of the solvency of the company at the time of incurring the debt
then they can escape from their liabilities under section 588G. In the presented case, such
defense does not seems to be available for the company as all three requirements are satisfied.
The liable people were appointed on the position of director and company was insolvent when
the incurred the debt. They were aware that the company is not in a good financial condition and
many of its debts are already running outstanding. In this manner, they had a reasonable belief of
insolvency position of the company. Hence in such a situation, the defense does not seems to be
available for them.
Answer 5
As mentioned in answer 4 of part A, the defense of safe harbour is not available in some
situations. Firstly, the directors did not take any steps that could bring better results to the
company. The company was running insolvent and directors borrowed money out of its
investor's fund for their personal benefits. Such borrowing was not at all a reasonable course of
action that could benefit the company. The further company did not release its obligations
towards employees. Secondly, the debt was not incurred directly or indirectly in relation to the
business. Directors also had their duties towards pending payment but they have done nothing
about it. The further court does not seem to have appropriate reasons for such failures and hence
the subjective defense i.e. Safe harbour will not be available to Mr. Daly and other directors.

BULAW5915 9

BULAW5915 10
References
Austlii.edu.au. (2019). Corporations Act 2001 - Sect 588g. Retrieved From:
http://www5.austlii.edu.au/au/legis/cth/consol_act/ca2001172/s588g.html
Australia. (2011). Australian Corporations & Securities Legislation 2011: Corporations Act
2001, ASIC Act 2001, related regulations. Australia: CCH Australia Limited.
Bryks, D. & Rihak, A. (2018). Australia: s588GA Corporations Act: a safe space for directors -
the safe harbour defence to insolvent trading. Retrieved From:
http://www.mondaq.com/australia/x/763042/Insolvency+Bankruptcy/A+safe+space+for+
directors+the+safe+harbour+defence+to+insolvent+trading
Bryks.com.au. (2018). A safe space for directors: the ‘safe harbour’ defence to insolvent trading.
Retrieved From: https://bryks.com.au/archives/a-safe-space-for-directors-the-safe-
harbour-defence-to-insolvent-trading-2/?
utm_source=Mondaq&utm_medium=syndication&utm_campaign=View-Original
Christodoulou, M. (2018). Investment fund directors borrowed clients' money for personal use.
Retrieved From: https://www.abc.net.au/news/2018-08-24/company-directors-borrow-
money-from-clients-as-asic-investigates/10157236
Corporations Act 2001 (Cth)
Hwlebsworth.com.au. (2017). Safe harbour for directors. Retrieved From:
https://hwlebsworth.com.au/safe-harbour-for-directors/

BULAW5915 11
Iknow.cch.com.au. (2019). Insolvent trading. Retrieved From:
https://iknow.cch.com.au/topic/tlp1758/overview/insolvent-trading
Lawhandbook.sa.gov.au. (2019). General Duties of Directors - Corporations Act 2001 (Cth).
Retrieved From: https://lawhandbook.sa.gov.au/ch05s04s02.php
Mallesons, K. & Mallesons, W. (2018). The dialogue is changing yet is the law enabling the
practical change directors need? Retrieved From:
https://www.lexology.com/library/detail.aspx?g=9b893b02-38d3-4d28-91b3-
797bdebc4680
Mallon, C. (2017). Restructuring Review. Law Business Research Ltd.
Marcar, K. & Renfrey, B (2017). The new safe harbour insolvency laws – basics for directors
and commercial contracting. Retrieved From:
https://www.jws.com.au/en/insights/articles/2017-articles/the-new-safe-harbour-
insolvency-laws-%E2%80%93-basics-for
Rodgersreidy.com.au. (2017). The Role of a Director: Duty to Prevent Insolvent Trading.
Retrieved From: https://www.rodgersreidy.com.au/articles/articles/the-role-of-a-director-
duty-to-prevent-insolvent-trading
Smith, G. & Gold, A. (2018). Research Handbook on Fiduciary Law. USA: Edward Elgar
Publishing.