Corporate Law: Duties of Directors and Safe Harbor Provision

This document discusses the general duties of directors of a company under the Corporations Act 2001. It also explains the safe harbor provision under section 588GA of the Act. The document further analyzes a case of breach of duties by directors and their eligibility for defense under the Act.

Running head: CORPORATE LAW
CORPORATE LAW
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Part A
Answer A
The Corporations Act 2001discusses in its various sections the general duties of the
directors of a company. The general duties of a director are also known as fiduciary duties as the
basis of these duties are faith, respect and mutual liability (Huebner & Klein, 2015).
In the Corporations Act 2001 the duties of a director are discussed under four main
categories. The four main fiduciary duties of a director are- due care and diligence, good faith,
not use their position in a way that is harmful for the company, not use the company’s
information for their personal use (Home, 2017).
The provisions regarding general or fiduciary duties are mentioned in the sections 180-
183 of the Corporations Act 2001 (Cth). In the section 180 the duty of a director relating to due
care and diligence is mentioned. A director is required under this section to act with due care and
diligence as can be expected from any reasonable person. Under the provisions of the section 181
a director is required, in the best interest of the company, to act in a good faith. A director under
the section 182 is refrained to misuse his position in the company for his personal benefits or for
the benefits of the others that can be detrimental to the company. Section 183 of the act further
refrains a director from misusing any information in regard to the business of the company for
his personal use or for benefitting others which can be termed detrimental towards the company.
Apart from these provisions section 188 mentions the duties of a director to provide with
ASIC all the information that is necessary to the business of the company. Section 191 provides
the duty of a director to disclose the affairs of a company under the sections 208 and 205G to the

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shareholders and investors of the company. A director is obliged to take any necessary and
reasonable steps to maintain correct financial reports of the company under the provisions of
section 344 of the Corporations Act. Section 588G of the act prohibits a director from involving
in trading activities when the company is either insolvent or is in risk of being insolvent. Section
674 of the act makes a director liable to disclose the information that affects the company’s share
to the investors and shareholders.
The duty of a director to prevent insolvent trading has been provided in the section 588G
of the Corporations Act (Huebner & Klein, 2015). The director is liable to perform this duty
towards the stakeholders and the investors. In the section 588G of the Act the duty of a director
to refrain the company from trading while it is insolvent or it has a risk to be insolvent has been
provided. A director when found to be in breach of this section can be imposed with a penalty of
$200,000 as mentioned in the part 5 of the Corporations Act (Hill and Conaglen, 2017).
Answer 2
The Corporations Act 2001 lays down various provisions relating to insolvent trading of
a company. Section 588GA of the Corporations Act 2001 (Cth) lays down the provision of safe
harbor. A director is provided with a defense in this section against insolvent trading that further
encourages them to attempt to restructure the company Dunn, 2017). If a director breaches any
provision of the act they are held liable for the loss that has been incurred by the company
(Hedges et al., 2016). The provisions mentioned under the Section 588G (2) of the act is
inapplicable to a director under two conditions. Section 588GA (1) of the Corporations Acts
provides these conditions- a director, after suspecting the insolvency of the company, has taken
certain course of action and has further appointed liquidators or administrators to prevent the
insolvency as soon as the company has incurred a debt because of the direct or indirect actions of

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the director for which any reasonable action cannot be taken. The director is further liable to
establish that proper maintenance of financial records, proving the fact that the company’s
business is conducted in a correct manner, is done.
Answer 3
The directors are provided with a protection against personal liability with the provision
of defense of safe harbor against insolvent trading under the Corporations Act 2001. Section 180
of the act applies the business judgment rule that provides the duty of care and diligence of a
director (Low & Low, 2018). Under this section a director is required to act with care and
diligent during the time of making any judgment in the best interest of the company under the
section 180(2). The director is needed to believe that the judgment made by him for the best
interest of the company was reasonable and rational.
There are certain points of difference between the sections 180 (2) and 588GA. The main
point of difference between the two sections is that the section 180(2) is applicable towards both
directors and the other officers of the company whilst the section 588GA is only applicable
towards the directors of the company. In the section 180(2) of the Act the rule of business
judgment is being laid down in compliance with the section 180(1) of the act whereas in the
section 588GA instead of imposing any duty towards the directors a defense is being provided
against any allegation.
Answer 4
There are certain restrictions in relation to the applicability of the safe harbor mentioned
under the section 588GA of the Act. These restrictions have been provided under the sections
588GA (4) and 588GA (5) of the same act. The restrictions can be described as-

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 It has to be established by the director that after there was a suspicion of the insolvency
of the company reasonable actions were taken by the director for safeguarding the
company.
 It has to be proved by the director that the debts incurred by him were related with the
best judgment decisions he has taken in the times of need.
 The director is further needed to be establishing the fact that because of the debts
incurred by the company the payments of the employees are not cleared.
By imposing the restrictions on the section 588GA the fact is established that either the company
is insolvent and is in failure of providing any statement of returns as has been mentioned under
the taxation law or it has failed to carry out its administrative responsibilities.
Answer 5
When there is a presumption of the company to be in the risk of insolvency the
Corporations Act restricts a director to involve in any kind of dealing that can be incurring debts
to the company. Any company can be described as insolvent if it is unable to pay off the debts of
the creditors. Insolvency can be described to be of two types. The first type of insolvency is
where a company already unable to pay its debts, the second type of insolvency can be described
as when the company is in the risk of being unable to pay off the debts in future. A director’s
duty is to safeguard the interests of the company’s investors and creditors. The directors can be
held personally liable if it is found that even when the director had the knowledge of the
insolvency the company or the chances of the company becoming insolvent yet the company had
been still found to be involved in trade. Section 588GA provides protection against these types of
liabilities.

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When a company turned insolvent before the incorporation of the section 588GA of the
Act there was no power or authority of the director towards the business of the company as the
company was handed over to the liquidators and administrators. However after the introduction
of the section 588GA of the Corporations Act relating to defense of safe harbor the control over
the business of the company has been in the hands of the directors which allowed the directors in
taking innovative measures for the benefits of the company. The directors are further allowed
under this section to take necessary steps for overcoming insolvency by interacting with the
company’s investors, shareholders and creditors.
When a debt is being refused to be paid by the debtor it is known as voluntary
insolvency. The changes in the provision of the Division 3 makes the creditors suffer by tight
lining a director’s position. The directors can be seen to misuse the safe harbor shield rampantly
for the protection against accusations of insolvent trading. The security of the creditors can be
seen to be in risk as the dishonest directors would further perform insolvent trading. The
aforementioned can be defined as the ill effects of the changes in the Division 3 on voluntary
insolvency.
Part B
Answer 1
In the case Peter Daly can be seen to be in breach of his duties as a director as mentioned
in the Corporations Act 2001. Mr. Daly is seen to be breaching the duty of care and diligence
mentioned under the section 180 of the act. He is further found to be in breach of his duty to act
in good faith for the best interest of the company as stated under the section 181. He is also
found to be in breach of section 182 by misusing his power as a director. As he misused the

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company’s funds for his personal use he is seen to be violating sections 181 and 182 of the
Corporations Act. Finally Peter Daly can be found to be in violation of section 184 as he did not
disclose the financial information of the company to the investors and shareholders.
Answer 2
Like Peter Daly the other two directors of the company can be held liable for the breach
of their duties as a director. The funds of the company have been misused by the directors for
their personal benefits instead of the company’s best interest. One of the directors have been
found to be using the company’s funds for his daughter’s marriage while the director was found
to be using the funds of the company for dissolving his marriage. In both cases the funds of the
company were found to be used for purposes other than their original purpose that is for the
company’s benefit and for returning to the investors. It can be described as the gross
misappropriation of funds by the directors.
By not acting in good faith, care and diligence and for the inappropriate use of their
positions in the company for their personal benefits the directors are seen to be in breach of
sections 180-182 of the Act. In furtherance, by not disclosing the company’s financial
information to the investors and shareholders and by not keeping proper financial records of the
company the directors are in a breach of the sections 191 and 344 of the Act. The directors are
also found to be liable for not keeping proper Annual financial reports and director’s reports.
Answer 3
The company can be found to be performing insolvent trading. The company’s condition
can be seen to be deteriorating since 2017 yet the company accepted investments from investors
under the pretence that the company’s financial position is good. It was further falsely promised

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by the company to the investors that their investments would be returned with interest on the
profit. The directors had knowledge that these conducts would result in the breach of both
fiduciary as well as statutory duties yet they carried on with the misconducts. Further the funds
of the company were misused by the directors for their personal use. As the investors’
investments are not returned the company can be said to be in the brink of insolvency. In this
case although investments were accepted by the directors on behalf of the company yet the
investors were not returned their shares so it can be said that company is doing insolvent trading.
Answer 4
The directors could be eligible for defending themselves under the provisions mentioned
under the Corporations Act against accusations of trading during insolvency if it could be proved
by them that during the time when the debts were incurred the company was completely solvent
and the company had no risk of becoming insolvent in the near future (Deva, 2013). It should be
further established by the directors that necessary steps for the prevention of the insolvency
would have been taken by them if they had any knowledge of it.
If a director can prove that because of some personal reasons or health related issues he
was not able to be part of the governance of the company he can defend himself under the
provisions of this Act.
Answer 5
The defense of the directors is protected under the provisions of safe harbor under the
section 588GA of the Corporations Act 2001 (Cth). The directors can be protected from the
accusations of insolvent trading under the provisions of this section.

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The directors under the provisions of this act can claim for the defense of safe harbor by
mentioning that they have been taking reasonable care since finding out the knowledge of the
company’s insolvency and by showing that certain measures and courses of action have been
taken by the directors for the reduction the effects of insolvency. The directors can further claim
that they had formed structuring plans to overcome the effects of insolvency in the company.
In reality of this case however the directors would find it difficult to take advantage of the
defense harbor after considerations are made against the steps and measures taken by them as
they were only concerned for their personal benefits instead of the benefits of the company. As
the directors did not participate in the activities carried out for the company’s benefit under the
provisions of the Corporations Act they would not further be allowed to defend themselves.

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Reference
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 harbor. 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.
Horne, A. (2017). Call for review of Corporations Act. Governance Directions, 69(8), 450.
Huebner, M. S., & Klein, D. S. (2015). The Fiduciary Duties of Directors of Troubled
Companies. AM. BANKR. INST. J., 34, 18-18.
Low, C. K., & Low, T. H. (2018). The Business Judgment Rule: A Safe Harbour for Directors?.
The Corporations Act 2001 (Cth)