Corporate Law & Safe Harbour Defense

This assignment delves into the fundamental principles of corporate law, emphasizing its crucial role in the daily operations of businesses. It explores the concept of 'safe harbor' defense, which offers protection to directors when they secure loans for company advancement. The discussion also touches upon amendments to Division 3, aiming to streamline voluntary winding-up procedures due to corporations being major profit generators.

CORPORATE LAW

Table of Contents
INTRODUCTION...........................................................................................................................1
PART A...........................................................................................................................................1
1. Is the duty to prevent insolvent trading a fiduciary duty? Why or why not?..........................1
2. How does the safe harbour defence Section 588GA operate?................................................1
3. Who does it (s588GA) protect, and is this different to the business judgement rule s180 (2)?
Give reasons................................................................................................................................2
4. Are there any restrictions on the operations of s588GA defence? If so, what are they?........3
5. Do you think the changes to Division 3 will have an effect on the number of voluntary
insolvencies in Australia in the future? Why or why not?..........................................................3
PART B............................................................................................................................................4
1. Did Mr. Daly breach any directors' duties? If so, which ones and how?................................4
2. Did any of the other directors breach their duties? If so, which duty and how?.....................5
3. Do you think the company was trading while insolvent? Give reasons.................................5
4. If the company was trading while insolvent-are there any defences available to Mr. Daly
and /or other directors? If so, what are they? Give reasons. ......................................................6
5. Would the new safe harbour defence assist the directors? If yes, how? If no, why not?........6
CONCLUSION ...............................................................................................................................8
REFERENCES................................................................................................................................9

INTRODUCTION
Corporate law is the body of law, rules and regulation that governs the business sector. It
is necessary because it tells that how any of the business is required to operate and what are those
things which need to consider while managing any of the activity which is related with
organisation. At present, all of the company is required to register themselves before
commencing any of the business activity. In context of this file, there is the detail discussion
about safe harbour defence in s588GA where number of questions will be answered and in the
second part there will be discussion related to the directors duty on the basis of “The talented
Mr. Daly”.
PART A
1. Is the duty to prevent insolvent trading a fiduciary duty? Why or why not?
Yes, it is the fiduciary duty to prevent insolvent trading because as per the section 588G
of Corporations Act, 2001, any of the corporation which is unable to perform there day to day
activity then it is called as insolvent trading. If any of the director takes loan in this situation then
they will be held personally liable in this situation. From the commencement of corporate law,
number of changes had been done so that better results can be obtained and because of that
liability of director have been imposed in that situation. It is assumed that most of the work in an
organisation is done by director so it is there responsibility that they must inform new and
existing investor about the financial position of the company (Welch and et. al., 2016). There are
number of work which should be done by director on daily basis and because of that they know
each and every information about the internal management system of of the company so in that
accordance director has the fiduciary duty to inform each and every information to the
management. Even their should not be any of the additional debt when association is in the state
of insolvent and if that happens then legal action can be taken against the director of the
organisation. Here, Directors are required to work ethically and honestly where each single detail
should be shared with other member of the organisation. It is important that director must work
as per the guidelines which are mentioned under the Corporation Act 2001.
2. How does the safe harbour defence Section 588GA operate?
There are number of situation where company want makes director personally liable and
for that Corporation Act 2001, have introduced the concept of safe Harbour so that directors can
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get additional benefit and cannot be held personally liable in most of the situation. Under Section
588G(2), it has been explained that how director can defence themselves in those situation where
organisation is declared as insolvent. Some of the conditions are explained below where directors
will not be held personally liable:
 The situation where directors want to improve the financial condition of an organisation.
 Debt incurred once the doubt of insolvent was created.
 The situation where director want to create number of alternate (Wang, 2015).
All the above mentioned point must be done for the purpose of betterment of an
organisation where it is necessary that these decisions must be taken only after consulting the
qualified professional who is expertise in their own field. Even there are some of the situation
where directors will be not be allowed to take the defence of safe harbour and those situation are
mentioned below:
 For the purpose of giving payment to the employees who are working for organisation.
 To complete all the requirements which are required for fulfilling the taxation report.
But, before taking the help of safe harbour it is necessary for director to prove some of
the additional things which are mentioned below:
 The steps which were taken by the management team was to avoid all debt amount which
was incurring.
 They were not involved with the management during the course of taking decision and
here directors are required to prove with valid reason.
3. Who does it (s588GA) protect, and is this different to the business judgement rule s180 (2)?
Give reasons.
Section588GA has been commenced for protecting the right and interest of all those
directors who have taken the best possible decision to reconstruct the organisation which have
been declared as insolvent (Tracol, 2016). In addition, it provides the opportunity to director
where they can save themselves from the liability which arises during the course of
reconstruction period. When it comes to section180(2) of Corporation Act, 2001, there are some
of the duties and work which need to be done by the directors which are given U/S180(1):
 All the decisions should be fair without any discrimination or personal benefit.
 All of the decision must be taken for the betterment of organisation.
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While discussing about section 588GA, it is only applicable in those situation where
association is declared as insolvent. Here, directors gets additional opportunity to make
themselves safe from arising of personal liability. It is the section which is beneficial for
directors who have taken taken the decision for reconstructing the situation of company. When
discussion comes to section 180(2), it applies in the condition where any of the firm is declared
as insolvent (Padova, 2016) . This section doesn't discusses about liability that who need to pay
the amount to creditors. But, if company is declared under this section then board of directors are
suspended for the specific period of time.
4. Are there any restrictions on the operations of s588GA defence? If so, what are they?
Safe harbour defence has developed the concept under section 588GA, where major
benefit is given to the directors. It is commenced so that directors will not be held personally
liable in that situation where decisions are taken for the betterment of an organisation so that
financial condition can be improved. Some of the restrictions on the operation of s588GA of
Corporation Act, 2001 are listed below:
 This section is not applicable on the debts which have been incurred before the
commencement of act.
 There are some of the additional work which are not allowed to any of the directors.
Additional work includes payment of employees, ATO returns, payment for the
remaining amount of tax which should be paid by the company.
 When any of the RATA forms are submitted then in that condition it will be assumed
that none of the application has been accepted by safe harbour.
It is said that burden of Proof always falls upon the director where they have to prove that
appropriate decision had been taken converting the worst situation of an organisation where all
the applications are required to be submitted. Here, directors are require to be punctual while
presenting their points. In the end, liquidator are appointed who need to take the charge of all the
assets so that he can sell them to pay the debt amount to creditors (Means, 2016).
5. Do you think the changes to Division 3 will have an effect on the number of voluntary
insolvencies in Australia in the future? Why or why not?
Voluntary winding up is the state where company is unable to perform there day to day
activity and by considering that directors of an organisation decides to wind-up the company by
filing the petition in the court. Here, member do not have any kind of pressure as it is done only
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after there mutual understanding. In recent period of time, it is found that most of the companies
are trying to wind up the company as profit is not generated as per the willingness of investors.
By considering all these issues lots of changes have been done in Division 3 because Corporate
sector is one of those rear field which generate maximum income within the boundary of
Australia (McQueen, 2016).
The amendment in Division 3 was done so that voluntary winding up can be reduced
through which legal provision can show its importance. Moreover, Safe harbour defence was
introduced so that problem of person liability can be removed when director have acted in good
faith. Remedy is very less when ever voluntary winding up is conducted and even assets of
organisation are also managed very easily with the help of connected parties. In the end, it can be
concluded that Division 3 have helped the maximum number of organisation where they are
willing to continue the business even in the situation where company is not performing well. At
present, voluntary winding is conduced only that situation where company is unable to sustain
the market position and it is better to wind up.
PART B
1. Did Mr. Daly breach any directors' duties? If so, which ones and how?
It was found that, there are some of the regulations which were breached by the Mr. Daly
who was working in the capacity of director in one of the company. It is said that whenever any
person work in the capacity of director he/she must understand what are the essential duties and
responsibilities which need to be fulfilled by them (The talented Mr Daly, 2018). Each and every
information related to director is mentioned in Section 5.3 of Corporation Act, 2001. The detail
list of director duty is written below:
 Directors are required to work for the best interest of an organisation.
 Every decision must be taken in that fashion where chances of conflicts and dispute
cannot be raised.
 Try to resume day to day operation when organisation fails to fulfil its major obligations.
 When voluntary winding up is conducted, it is the duty of director that must appoint the
liquidator who can take the charge of all assets which are require to be sale for paying the
debt amount to creditors.
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In the above case, it was found that Mr Daly exploited to fund of organisation which was
given by the investor of the company. The fund which was raised by the investor was used by Mr
Daly for the settlement of divorce case (Husovec, 2017). The money was used against the
Memorandum of Association. Even director accepted that he did worked as per the legal
provision which are mentioned in the act. Also, they breached the duty of directors.
2. Did any of the other directors breach their duties? If so, which duty and how?
In any of the organisation, directors plays the most important role as they know each and
every thing which is related to firm because all of the decision are taken by the Board of
Directors. In context of the case, there were altogether four directors in the company and all of
them were questioned at the time of investigation because they were the one who misguided all
of the investor to invest in their organisation. None of the company is able to take their decision
because it is the artificial person who cannot work of their own. It is said all of the directors have
the secret information and that were price sensitive too. As, other director knew the reason for
raising the fund which proves that even they also breached their duty which must be done by
them because they could have informed the stakeholder about the money which was being used
unethically.
Every director must know that they are not allowed to involve themselves in those cases
due to which organisation is required to wind up. As per the law, every member have the rights
and authority to know about the fund which they have invested within the company but directors
of the association didn't even thought to inform them. In context of other directors, they could
have given the appropriate suggestion to Mr Daly about the money that he is not allowed to use
unethically (Dorresteijn and et. al., 2017). So, it can be understood that all directors have
breeched the duty where were delegated to them.
3. Do you think the company was trading while insolvent? Give reasons.
There were lots of difficult situation which is being faced by the organisation and that
was one of the main reason that investor had to raise the additional amount of money. Any of the
organisation can be declared insolvent when they will not be able to clear the debt amount of
carry on the day to day operation. Organisation was even facing the problem of cash flow due to
which they were unable to sustain the market. The main duty of all the directors in organisation
is to prevent any of the debt specially in those situation where company is near insolvency.
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It face difficulty in cash flow, and the position of the corporate get worse. According to
Corporation Act, 2001, it is duty of director to prevent the incurring any debt when a company
has become insolvent. In context of the case, Mr Daly used the fund for the personal financial
problem because here company has raised the money and even they didn't used it in appropriate
manner (Cloots, 2018) . As company didn't have the enough found to manage regular activity
and it was not possible for them to work in those situation where they are declared as insolvent.
4. If the company was trading while insolvent-are there any defences available to Mr. Daly
and /or other directors? If so, what are they? Give reasons.
Mr Daly and his organisation was performing their task even after the organisation was
declared as insolvent but they have number of reason which available with them and they are
explained below:
 Reasonable grounds to except solvency: There is a section 588H(2) which explains that
directors have taken the loan in that situation where was solvent and has the capability to
bounce back in future and it will not fall under the state of insolvency.
 Reliance on information provided by subordinates: Here, company is totally reliable
on the information which are provided by the subordinates subject to the solvency
position of the company.
 Absence from management of the company: When any of the director who is not
available within the premisses of company and they can be able to prove it then they have
the option to raise defence. It is necessary that reason must be given valid (Carrera and
Guild, 2015).
 All reasonable steps to prevent company incurring debt: Directors have the option to
raise fund where put their efforts so that company can compete in the market but
directors have the burden to prove that loan was taken for the betterment of organisation.
All of the mentioned information are true in which director has the option to defence
themselves but at the end of the day burden to prove the fact is on Directors.
5. Would the new safe harbour defence assist the directors? If yes, how? If no, why not?
In case of Mr. Daly, the are not allowed to take the help of Safe harbour defence. It is
necessary in safe harbour defence that director should take the loan for the benefit of
organisation so that association can perform better in future (Bottomley, 2016). But, in case of
Mr Daly they raised the capital for personal benefit which was unethical because their main
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target was to do fraud with investor. Daly was willing to take personal advantage in the name of
organisation so in this case directors can be held personally liable for the current position of the
organisation (Baker, 2018).
Safe Harbour defence is always for those directors who perform their task ethically by
following all the legal provision which can provide advantage to the company. Always debt is
taken for improving the position of the company but in case of Mr. Daly they perform
completely against the policy where he used money for the purpose of divorce. So, it can be said
that Peter Daly is not authorised to take the help of self defence harbour (Allen, 2017).
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CONCLUSION
It can be concluded from the above file that corporate is one of the most essential law to
operate day to day activity of any of the business organisation. Even non of the organisation is
allowed to breach the term and condition of corporate law. Safe harbour defnece is one of the
concept which is providing benefit to directors in those situation where they have taken the loan
for the progress of company. Division 3 has been amended so that issue of voluntary winging up
can be resolved because corporation are the main source of earning maximum amount of profit.
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REFERENCES
Books & Journals
Allen, W. T. (2017). Our schizophrenic conception of the business corporation. In Corporate
Governance (pp. 79-99). Gower.
Baker, M. (2018). Translation and conflict: A narrative account. Routledge.
Bottomley, S. (2016). The constitutional corporation: Rethinking corporate governance.
Routledge.
Carrera, S. and Guild, E. (2015). Safe Harbour Or Into the Storm?: EU-US Data Transfers After
the Schrems Judgment. Centre for European Policy Studies.
Cloots, E. (2018). Safe harbour or open sea for corporate headscarf bans? Achbita and
Bougnaoui. Common Market Law Review. 55(2). 589-624.
Dorresteijn, A. and et. al., (2017). European corporate law. Wolters Kluwer.
Husovec, M. (2017). Holey cap! CJEU drills (yet) another hole in the e-Commerce Directive’s
safe harbours. Journal of Intellectual Property Law & Practice. 12(2). 115-125.
McQueen, R. (2016). A Social History of Company Law: Great Britain and the Australian
Colonies 1854–1920. Routledge.
Means, R. C. (2016). Underdevelopment and the Development of Law: Corporations and
Corporation Law in Nineteenth-Century Colombia. UNC Press Books.
Padova, Y. (2016). The Safe Harbour is invalid: what tools remain for data transfers and what
comes next?. International Data Privacy Law. 6(2). 139-161.
Tracol, X. (2016). “Invalidator” strikes back: The harbour has never been safe. Computer Law &
Security Review. 32(2). 345-362.
Wang, J. (2015). Toward a more balanced safe harbour protection system for internet service
providers in China. Hong Kong LJ. 45. 881.
Welch, E. P. and et.al., (2016). Folk on the Delaware General Corporation Law: Fundamentals.
Wolters Kluwer Law & Business.
Online
The talented Mr Daly. 2018. [Online] Available Through
<https://www.abc.net.au/radionational/programs/backgroundbriefing/updated-the-
talented-mr-daly/10282810>
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