Company Law

Running head: Company Law

Company Law
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Contents
Answer to Q(a)..................................................................................................................2
Issue...................................................................................................................................2
Rules..................................................................................................................................2
Application........................................................................................................................4
Conclusion.........................................................................................................................5
Answer to Q(b)..................................................................................................................6
Issue...................................................................................................................................6
Rules..................................................................................................................................6
Application.........................................................................................................................8
Conclusion.........................................................................................................................9
Bibliography.....................................................................................................................10

Company Law
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Answer to Q(a)
Issue
The issues as identified in the case study pertaining to the advise being given to
the liquidator if the unpaid amount of $251,000 can be recovered from its
members and if the liquidator shall succeed or not in recovering the amount.
Rules
Section 9 of the Corporations Act 2001(Cth), the director can be defined as the
person who is authentically appointed as a director or an alternate director. A
person though not appointed as a director, he can act in the position of the director
i.e. de facto director. Lastly, even a person is not appointed as a director, the
directors are accustomed to act in accordance with the instructions or wishes of
that person. He can be termed as a shadow director1.
As per section 588G of the Corporations Act (Cth), the directors of the company
can be held personally liable in case the company has incurred a debt when it is
insolvent and there have been reasonable grounds to suspect that it has remained
insolvent. As a result, criminal and civil sanctions can be imposed on the directors
who have violated Section 588G. The directors breach this section if they fail
from avoiding the company from incurring the debts provided if:
1. They are aware regarding the grounds of suspecting that the company is
insolvent.
1ASIC , Directors' liabilities when things go wrong(28 September 2016)< https://asic.gov.au/for-
business/your-business/tools-and-resources-for-business-names-and-companies/asic-guide-for-
small-business-directors/directors-liabilities-when-things-go-wrong/#personal>

Company Law
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2. A reasonable person in a similar situation in the position of a director must
be aware of such circumstances2.
Section 588G (3) illustrates that a person has committed an offense if:
1. A company has incurred a debt at that particular point.
2. He was a director when the debt was incurred.
3. The company is insolvent at that time or becomes insolvent as the debt
was incurred.
4. The person has suspected at that time as the debt was incurred due to
which the company became insolvent or would become insolvent because of
incurring of debts by the company.
5. The failure of the person in preventing the company from incurring the
debt was dishonest3.
In reference to this, the test of solvency has been established under section 95A of
the Act which states that a person is a solvent if he is able to repay all the debts of
the other person as and when they become due and are liable to be paid. It has
also declared that a person who is not solvent is insolvent.
The indications of potential insolvency are that a prudent director must discharge
his duties taking note about the commercial position of the company. As per
ASIC Regulatory Guide, 217 which states the duties to prevent insolvent trading
illustrates that a company can be declared insolvent if there is a history of
continuous losses and a company is unable to produce appropriate financial
information. It has defaulted or is about to default regarding its financial
activities. Lastly, a legal action has been threatened against the company. So the
2 Derek French, Stephen Mayson, Stephen W. Mayson and Christopher L. Ryan ,Mayson, French &
Ryan on Company Law(Oxford University Press,2014) 100
3 Frank Clarke, Graeme Dean and Matthew Egan, The Unaccountable & Ungovernable
Corporation(London :Routledge,2014) 100.