Business Law

Running head: BUSINESS LAW
Business Law
Name of the Student
Name of the University
Author Note

1BUSINESS LAW
Table of Contents
Part A.........................................................................................................................................2
Part B..........................................................................................................................................6
References................................................................................................................................11

2BUSINESS LAW
Part A
Question 1
The general or the fiduciary duties of a director direct him to act with due care,
diligence and in good faith. The fishery duties also ask the director not to misuse his powers
and to act in such a way that it would not be in conflict with the best interest of the company.
A director must not derive any personal gains from the company around with maintaining the
secrecy and privacy of the insider information of the company with an outsider1.
However the director’s duty to prevent insolvent trading is not a fiduciary duty but a
statutory duty as held in the Corporations Act, the principal legislation for Corporations in
Australia2. Fiduciary duties are the duties that are imposed upon a person based on trust on
that person or the position that the person is holding. While, a statutory duty is the one that is
imposed on a person by way of a statute or formal written legislation in a state. Therefore the
statutory duty of the director to prevent insolvent trading has its place in the corporations Act
under section 588G3. This provision refrains director from engaging into insolvent trading
and thus breaching the provision would cost him $200,000 as a penalty under part 5 of
Corporations Act 20014. Therefore for breaching the statutory duty of refraining from
engaging into insolvent trading, a director can be penalised and held liable to pay
compensation for the loss sustained by the company5.
Question 2
A director is refrained from engaging into trade when the company is under debt and
it is on the verge of insolvency as directed by the provisions of Corporations Act. When the
1 Marsh, Sam, and Shane Roberts. "Risk management: Insolvency safe harbour for'honest'directors." (2017)
69.5 Governance Directions 275.
2 Corporations Act 2001 (Cth).
3 Ibid.
4 Ibid.
5 Marsh, Sam, and Shane Roberts. "Risk management: Insolvency safe harbour for'honest'directors." (2017)
69.5 Governance Directions 275.

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directors breach their statuary duty of refraining from engaging into insolvent trading, they
are held liable legally for the losses sustained by the company due to such trading carried on
at the verge of insolvency or that the company became insolvent due to such debt. To
institute a legal action against the director and to make him liable for compensation, it must
be established that the directors had enough opportunity and reasonable grounds to foresee
that such trading would affect the company’s financial situation and might even push the
company into insolvency. The director on the other hand in their defence must state that they
had tried their best not to engage into trading at the cost of the company's financial health.
The directors can defend themselves in accordance to Section 588 GA under the
Corporations Act 2001 which allows a safe harbour for the directors when they are charged
with irregular activities regarding the company6. Section 588 GA (1) of the corporations Act
secures the position of the director if accused of insolvent trading in case it is established that
the director had incorporated enough reasonable measures for preventing the company to
engage into insolvent trading7. This action is known as safe harbour for the directors for it
saves them from unnecessary legal actions8. However it needs to be established that there are
appropriate accounts and financial records of the company maintained by the particular
departments on the direction of the director establishing the fact that such insolvent trading
could not be stopped even though the company was suffering from debt issues.
Question 3
Section 588 GA of the Corporations Act protects a director under the principle of safe
harbour pertaining to the allegation that a director has engaged into insolvent trading which is
a breach of statutory duty on his part9. This provision protects the director whenever they
6 Corporations Act 2001 (Cth).
7 Ibid.
8 Hill, Jennifer G., and Matthew Conaglen. "Directors’ Duties and Legal Safe Harbours: A Comparative
Analysis." (2017) Research Handbook on Fiduciary Law, DG Smith, AS Gold, eds, Edward Elgar, UK.
9 Corporations Act 2001 (Cth).