Understanding Business Law and Director's Duties

This document provides an overview of business law and the duties of a director. It discusses the general duties of a director, including fiduciary duty and the duty to refrain from insolvent trading. The document also explores the concept of safe harbour and the defences available to directors. It includes a case study on Peter Daly and the breach of director's duties. Suitable for students studying business law or anyone interested in understanding the legal responsibilities of directors.

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

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Table of Contents
Part A.............................................................................................................................2
Question 1..................................................................................................................2
Question 2..................................................................................................................2
Question 3..................................................................................................................3
Question 4..................................................................................................................4
Question 5..................................................................................................................5
Part B..............................................................................................................................6
Question 1..................................................................................................................6
Question 2..................................................................................................................6
Question 3..................................................................................................................7
Question 4..................................................................................................................8
Question 5..................................................................................................................8
References....................................................................................................................10

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Part A
Question 1
The general duties of a director also known as fiduciary duty requires a director to act
in good faith with due care and diligence, not to misuse power, must avoid conflict of
interest, must act in a way for the best interest of the company, must not make personal
games from the company, and should maintain the confidentiality of the information of the
corporation. However, the duty of the director to refrain from insolvent trading comes under
the Corporations Act 2001 (Cth).
The general or fiduciary duties of the directors are imposed upon them on mutual trust
that exists among the parties to a contract, binding them in a relationship (Bruner, 2013). On
the other hand statuary duty imposes obligation on the director to adhere to a certain standard
of reasonable care to foresee any probable harm while executing their duties. Section 588G
of the Corporations Act 2001 (Cth) states the duty of the director to refrain from insolvent
trading, which should not be breached by the directors otherwise they are imposed a penalty
of $200,000 under part 5 of the Act (Hill & Conaglen, 2017). Therefore the directors could be
held liable for paying compensation for breaching a statutory duty for which the corporation
may have suffered certain injury or loss; however, the director may not be required to
compensate for breaching a fiduciary duty (Bruner, 2013).
Question 2
The Corporations Act 2001 lays down provisions that reference a director from
reaching his statutory duty to refrain from trading in a situation when the company is
insolvent and is under debt (Marsh & Roberts, 2017). In case of breach of this provision the
directors ourselves personally liable for the losses that the company has incurred due to the
debt accumulated while insolvent trading, or became insolvent by way of such debt (Hedges

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et al., 2016). To fetch compensation from the Director for breaching his statutory duties, it
must be proven that he had reasonable and sufficient grounds to foresee the probability of the
company of becoming insolvent of becoming insolvent and therefore must have refrained
themselves from trading in such condition (Marsh & Roberts, 2017).
However the directors are bestowed with a provision to defend themselves under
Section 588 GA of the Corporations Act 2001. This section provides a safe harbour to the
directors for defending themselves from situations where they are blamed for certain
activities of the corporation (Hill & Conaglen, 2017). Section 588GA(1) of the Act save the
directors from the liability that arises when they are accused of insolvent trading under
Section 588G(2) of the Act. This defence are offered to the director if it is proved that the
director had embraced proactive steps for preventing the corporation from carrying out
insolvent trading (Marsh & Roberts, 2017). It must be established that the directors must have
suspected the insolvency of the company and had taken steps from entering into any
transactions that may have boosted the course of insolvency. It also needs to be established
that the company had kept appropriate financial records to prove that the business course was
being conducted correctly.
Question 3
It is the Directors of a corporation that are protected by the safe harbour defence as
laid under section 588GA of the Corporations Act 2001 (Dunn, 2017). The directors are
protected by this provision for the time when they acted in the position of directors while the
company was involved in insolvent trading or during any other statuary breach of conduct.
Section 588 GA and section 180 (2) of the Corporations Act 2001 (Cth) must be
differentiated on the basis of their approach towards its stakeholders. Section 180 (2) of the
Act lays down the principle of business judgement rule which must also comply with
section 180 (1) of the same Act as both exhibit duties that the directors are required to fulfil;

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as section 180(1) directs the director to act with care and diligence towards the corporation
while section 180(2) ask the director to make use of their positions wisely, as for a director to
make a business judgement, it would be necessary for him to abide by the requirements of
fulfilment of his duty of care and diligence towards the corporation (Legg & Jordan, 2013).
While on the other hand, Section 588GA does not imposes any duty upon the director,
instead it provides provisions of defence for the directors for crucial conditions. Therefore the
former or the best judgement rule is a duty imposing provision under the Corporations Act
2001; while, the latter or the safe harbouring method is a defensive provisions for the
directors for safeguarding themselves when allegations are brought against them pertaining to
the misconduct (Marsh & Roberts, 2017).
Question 4
The restrictions on the operations of section 588GA of the Corporations Act as
follows:
 Director must establish the fact that he had suspicion about the insolvency of the
company and that for this reason he had taken reasonable actions to safeguard the
company from falling out.
 The directors must prove that the debts incurred by the corporation have some kind of
relations with the best judgment decision that was taken by the Director in times of
need.
 It must be established that the company is unable to pay its employees due to the debt
so incurred.
These restrictions are imposed on Section 588GA to establish the fact that the
company is suffering from insolvency as it has failed to provide any e form of statement or
returns as directed by the taxation law or the company has failed to carry out the
responsibilities that it's needed to execute as administrator.

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Question 5
The Corporations Act 2001 (Cth) lays down duties upon the directors to prevent from
trading when it is easy to presume that there would be an incident of insolvency that would
be faced by the corporation. A company is considered to be in solvent when it has failed to
repay its debt. However the concept of safe harbour rule under section 588GA of the same
Act provides for a defence for the directors when the company might have made certain
transactions while it had turn insolvent. The safe harbour rule was introduced under the
corporations act in order to encourage the directors and also to instil a change in the
boardroom for governing the corporation at such a critical situation without having to call for
a legal practitioner for settling the insolvency. The directors are directed to engage with the
activities of the stakeholders especially at times when they suspect about the probable
insolvency that the company might see in future.
Voluntary insolvency refers to the type of insolvency where the debtor refuses to
repay his death amount from the individual or company from where it was taken. By tight
lining the positions of the director, the provisions under Division 3 of the Act would make the
creditors suffer more than ever due to the changes in Division 3. The shield of safe harbour
rules shall be used more rampantly by the directors for protecting themselves from
accusations of insolvent trading thereby getting them involved into more and more immoral
acts. This would age the dishonest directors to go further for trading while the company is
insolvent, thereby putting the security of the predators at-risk who would be unaware of the
financial situation of the company in which they are investing.
Therefore these are the probable changes of ill effect that the changes of Division 3
would have on voluntary insolvencies in Australia by affecting the creditors.

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Part B
Question 1
In this case, Peter Daly would be held for breaching his duties of a Director under the
Corporations Act 2001. The director’s duty to act with care and diligence under section 180
of the Act has been breached in this case. Section 181 which is directing the directors to act
in good faith for the best interest of the company has been breached. In addition section 182
of the Act that asks the director to refrain from misusing their powers for the best interest of
the company has been jeopardized as well.
It can be clearly stated that Peter breached section 180 of the Act for not exercising
his power to act with due care and diligence for the best interest of the company. He has also
violated section 181 and 182 for not acting in good faith as he had misused the fund of the
company for his personal benefit. Lastly it can be held that teacher had violated section 184
of the Act as well for he did not disclose the information with the shareholders as well as the
investors for keeping them informed about the financial conditions and governance of the
company.
Question 2
Not only Peter Daly, but the other two directors would be held liable for the breach of
the duty of directors for it can be clearly seen that they did not make use of the fund of the
company for achieving the best interest of the company but for their personal benefit. One of
the Directors was found to have made use of the fund of the company for dissolving his
marriage while the other was found to have used it for getting his daughter married. In both
the cases the fund of the company has been used for reasons which are inconsistent with the
purpose for which it was supposed to be used, which is for the benefit of the company and for

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returning it to the investors. Therefore it can be held as a gross misappropriation of the
company fund that was done by the directors.
Therefore for establishing the breach of the duties of the director, the statutory
provisions pertaining to the director’s duty under the Corporations Act needs to be revisited.
The director’s duty to act with care and diligence under section 180 of the Act has been
breached in this case. Section 181 which is directing the directors to act in good faith for the
best interest of the company has been breached. In addition section 182 of the Act that asks
the director to refrain from misusing their powers for the best interest of the company has
been jeopardized as well. Section 191 of the Act asks the directors to disclose the information
related to the performance of the company. The directors in this case have breach of all the
above provision. They are guilty of not acting in good faith for achieving the best interest of
the company. They failed to take care and diligence towards the performance of the company
as well. They misused their position as directors to tamper with the company fund for their
personal use. Lastly, they hid the information pertaining to the financial condition of the
company to the investors who were eligible to know such information before investing.
Question 3
From the activities of the company it can be noted that the company was indulging in
insolvent trading. It could be easily traced for the condition of the company was deteriorating
from 2017 yet it was accepting investment from the investors under false impression of good
financial condition and performance of the company. The company assured the investors of
returning their investment along with the agreed interest on the profit, which was however,
false. Such misconduct or misappropriation was carried out by the directors themselves
against the investors, knowing that it is a breach of their fiduciary as well as statutory duties.
Knowing the poor financial condition of the company, the directors still took out money from

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the company fund for their personal use. In addition, it could also be held that a situation
when the investors do not get back their investments from the concerned company, it could
be sign that such company is at the brink of insolvency. Similar situation was recorded in this
case where the directors were although accepting money from the investors, however was not
returning them their share, which is a clear indication of trading even being insolvent.
Question 4
The directors are available with several defences pertaining to the accusation of
insolvent trading. The directors could defend themselves against the accusation of insolvent
trading only if they could establish the fact that the company had incurred the debt in a
situation where there was no assumption of the company of getting insolvent; the company
was very much solvent when such debt was incurred and there was no reasonable cause to
assume that the company may turn insolvent (Deva, 2013). The directors must also establish
the fact that if they had any reason to believe that the company would be insolvent for some
reason, they would have taken all necessary actions to prevent such insolvency. The director
could also defend himself by citing that the information of solvency of the company was
provided by a person who is capable and reliable enough to be trusted for such information.
In addition, it could also be taken for a defence if the director states that due to
personal reasons or illness he was not being able to be part of the governance of the company,
as otherwise he would have certainly taken steps to protect the company from incurring a loss
or debt (Deva, 2013).
Question 5
The directors could have availed the defence of ‘safe harbour’ as laid down under
section 588GA of the Corporations Act 2001 (Cth). The Directors in this case would be
protected by the provision of Section 588 GA under the Corporations Act 2001, to defend
themselves. This section provides a safe harbour to the directors for defending themselves

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from situations where they are blamed for certain activities of the corporation. Section
588GA (1) of the Act save the directors from the liability that arises when they are accused of
insolvent trading.
Here, the directors could cite that they had taken reasonable care since they had
known that the company was drowning in insolvency. They could show that they had
undertaken certain measured and course of action for lowering the adverse effect of the
insolvency. They can claim to have formed a restructuring plan for overcoming the harsh
effect of insolvency.
However, in this particular case, it quite unlikely that the directors actually undertake
any of the above stated remedial measures and therefore it would be difficult for them to
defend themselves, for they were not only involved in insolvent trading, but also in various
other directorial misconduct and breach of duty as laid down under the Corporations Act
2001 (Cth).

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References
Bruner, C. M. (2013). Is the Corporate Director's Duty of Care a Fiduciary Duty-Does It
Matter. Wake Forest L. Rev., 48, 1027.
Corporations Act 2001 (Cth)
Deva, S. (2013). Sustainable Business and Australian Corporate Law: An
Exploration. University of Oslo Faculty of Law Research Paper, (2013-11).
Dunn, J. (2017). Safe harbour. Company Director, 33(6), 28.
Hedges, J., Bird, H., Gilligan, G., Godwin, A., & Ramsay, I. (2016). The policy and practice
of enforcement of directors' duties by statutory agencies in Australia: An empirical
analysis. Melb. UL Rev., 40, 905.
Hill, J. G., & Conaglen, M. (2017). Directors’ Duties and Legal Safe Harbours: A
Comparative Analysis. Research Handbook on Fiduciary Law, DG Smith, AS Gold,
eds, Edward Elgar, UK.
Legg, M., & Jordan, D. (2013). The Australian Business Judgement Rule after ASIC v Rich:
Balancing Director Authority and Accountability. Adel. L. Rev., 34, 403.
Marsh, S., & Roberts, S. (2017). Personal liability for insolvent trading: Company directors
find berth in safe harbour. Governance Directions, 69(10), 611.
Marsh, S., & Roberts, S. (2017). Risk management: Insolvency safe harbour for' honest'
directors. Governance Directions, 69(5), 275.