Corporate Law: Duties and Liabilities of Directors

This document discusses the duties and liabilities of directors in corporate law, specifically focusing on the consequences of insolvent trading and breach of fiduciary duty. It explains the fiduciary duty of directors towards the company, shareholders, creditors, and investors. It also explores the provisions under the Corporations Act 2001 (Cth) that protect directors who have incurred liability for insolvent trading. Additionally, it examines a case study involving misappropriation of funds by directors and analyzes their breach of duties. Overall, this document provides a comprehensive understanding of the legal responsibilities of directors in corporate law.

Running head: CORPORATE LAW
Corporate Law
Name of the Student
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Author Note

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Part A
Question 1
The directors of a company conferred with the power to manage the affairs of the
company. The treated as a separate individual as that of the personality of the company. The
directors are generally regarded as the agents of the company (Austlii.edu.au, 2019). They are
required to be acting on behalf of the company and has the power of representing the
company. This imposes directors with duty towards a company. In this regard, it needs to be
mentioned that the directors are not the owners of the company. The ownership of the
company belongs to the shareholders. The investors and creditors of the company are also
accrued with certain rights upon the assets of the company. Hence the directors owes
fiduciary duty towards the company as well as the shareholders creditors and investors.
Under section 588G of the Corporations Act 2001(Cth) the directors are conferred with the
duty of refraining from indulging into any insolvent trading while discharging their function
on behalf of the company. This can be explained with the case of The Stake Man Pty Ltd v
Carroll [2009] FCA 1415. In case a director indulges into any trading which has the
probability of causing insolvency of the company, he will be liable to have breached the best
interest of the company and his duty of good faith (Austlii.edu.au, 2019). The fiduciary duty
requires the directors guarantee their actions to have been carried out ensuring the best
interest of the company. Indulging into any trading that has the effect of causing the company
to go under insolvency will not be construed to have affected ensuring the benefits of the
company. Moreover director the fiduciary duty both towards the company as well as all the
shareholders creditors and investors of the company. Hence indulging into any activity that
will make the company insolvent will cause detriment both the company as well as the
shareholders creditors and the investors. It can be stated that refraining from insolvent trading
is required to be considered as a fiduciary duty.

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Question 2
Under section 588G of the Corporations Act 2001(Cth) a director of a company is
restricted from proceeding with any activity that has the effect of putting the company into
insolvency. In this regard it can be stated that the mere probability of the company of
becoming insolvent if any action has been taken will be treated as an activity causing
insolvency. Under this section the directors are likely to incur a civil liability on the event of
indulging into insolvency trading. Section 588GA has been inserted in this Act for the
purpose of providing a defence to the directors who has incurred liability under section 588G
(Austlii.edu.au, 2019). For the purpose of seeking resort under this section the directors are
required to establish that the action that has been taken by them which has caused the
insolvency has been committed with a good faith to ensure and advantages position for the
company as well as the creditors under the given set of situation. For the application of this
section, needs to be proved by the director that their action has been undertaken for the
purpose of ensuring the benefits of the creditors even if the company has been put under the
verge of insolvency.
Question 3
Section 588GA of the Corporations Act 2001 (Cth) extends protection directors of a
company who have been involved in activities which has the effect of taking the company on
the verge of insolvency. Section 588G of the Act prohibits director to involve in such an
activity which has the effect of making the company insolvent where the director has
knowledge that his action will have the effect of making the company insolvent
(Austlii.edu.au, 2019). Section 588GA of the Act provides for safe harbour for the directors
who have alleged to have contravened the provisions section 588G. To avail resort under this
section, the director needs to establish that the course of action that he has adopted, in a
particular situation, which might put the company into insolvency has been adopted in a good

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faith on the part of the directors that such an action would ensure the best results and restore
the interest of the company and the creditors, even if the company goes to insolvency.
Section 588GA provides for the safe harbour for the directors who are alleged to have
breached section 588G of the Act. On the other hand, section 180(2) provides for a defence
towards the directors who has been alleged to have contravened any of the duties as a director
of the company as provided under the Act (Austlii.edu.au, 2019).
Question 4
The protections that are extended to the director who has indulged into insolvent trading
under section 588GA of the Act will be required to be imposed with certain restrictions while
availing resort under this section. Firstly any director seeking resort on the deception need to
establish that the course of action he has adopted, after being conceived with the suspicion
that it might lead to insolvency for the company, was the best course of action, in his belief,
in that set of circumstance. Secondly the director who has been striving to seek protection
under this section needs to establish that any debt that he has incurred by way of insolvent
trading has been incurred by him to ensure the best interest pertaining to the company.
Thirdly the protection under this section will not be available to the directors if it has been
evident that the directors have incurred a debt while they has the contention that the company
was unable to pay remuneration belonging to the employees while company was still solvent
(Austlii.edu.au, 2019).
Question 5
Under the Corporations Act 2001 (Cth) the directors of a company are restricted from
indulging into any activity which has the probability of turning the company insolvent. For
being held liable under this section, the knowledge of the director regarding the probability of
that insolvency is required to be established. In this context, a company will be rendered as

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insolvent if it loses its capacity to payback all its debts in full satisfaction out of its assets.
This Act holds the directors of a company liable for any activity that they have indulged into
on behalf of the company which has the affinity of putting the company into insolvency.
However, this Act also assists the directors who has been alleged to have been involved in
such an act of promoting insolvency. It requires the directors to avail the assistance of an
expert practitioner who is adequately equipped with competence of dealing with insolvency.
However under section 588GA of the Act, the directors are permitted to proceed with the
handling of the matter of insolvency which has been made probable. However for the purpose
of handling the insolvency without the assistance of an expert in that field, directors are
required to ensure that the course of action has been proposed to have adopted was providing
the guarantee of uplifting the interest and advantages of the company. This provides the
directors with the scope to join hands with the shareholders to combat insolvency when there
is an affinity of the company of being insolvent. This is innovation that has been brought to
the corporation law for the purpose of providing accompany with a chance of combating the
evils of the insolvency without contravening any of the rights of any person interested with
the conduct of the company.
Any debtor, whether a company or an individual who has been liable for debts towards
other individuals all companies has failed to repay the same and has extended a declaration of
his inability to pay the same will be construed to have taken up voluntary insolvency. The
safe harbour rules that has been extended under this Act in division 3 has created new perils
for the creditors and has conferred the directors with power to cause mischief to the creditors
and depriving them from their extended money by taking resort under voluntary insolvency.
This provides the directors with scope of fabricating various reasons for the justification of
their acts of insolvent trading. This will confirm the directors with the right to carry out
insolvent trading activities with more arbitrariness. Under this section of the Act, the

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directors are conferred with powers to act independently in declaring insolvencies and
reaping the benefits at the cost of the detriment of the creditors. This will extend the directors
with the scope of indulging into trading even if they are satisfied with the fact that the
company has became insolvent or is on the verge of becoming insolvent and avail money
from the creditors without disclosing the same to them. This would create a great risk for the
creditors of the company who are unaware of the knowledge of the alleged insolvency of the
company (Austlii.edu.au, 2019).
Part B
Question 1
Mr Daly was the director of the Linchpin Capital Group who has been to have
misappropriated 20 million dollars raised through an investment fund. Under the
Corporations Act 2001 (Cth), the directors are imposed with certain duties to be exercised
while discharging their function as a director (www.abc.net.au, 2019). Under section 180 of
the Act the directors are imposed with the duty to maintain due diligence and proper care
while acting as a director of the company. Section 181 of the Act requires the director to
ensure their acts to be in good faith which has the chief objective of availing the advantages
position of the company. Section 182 of the Act restaurant directors from indulging into any
activity that uses their position as a director to derive personal benefit for them and that was
still benefit has been reaped at the cost of the detriment of the company. Under section 183 of
the act the directors are bird from utilising any information that has been accessible to them
by virtue of their position as a director in the company personal benefit and affecting a loss
towards the company. Under section 184 of the act the directors are prohibited from making
use of their designation in the company for the purpose of causing abuse to the company and
it's shareholders. Under section 191 of the act the directors I required to furnish all the
information in relation to the management of the company to the shareholders. In the present

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circumstances, Mr Daly has been involved in activities where he has been utilising the funds
raised from the investors for the purpose of serving his own needs. He was also channelizing
the funds towards other directors depriving the investors. The structure of the fund was that
of the ponzi scheme where the money invested by certain investors is to be returned from the
money availed from fresh Investments. All these points towards the breach of the duty as a
director on the part of Mr Daly. He was in in breach of section 180 of the act as used his
position as a director in a manner, which cannot be considered to be diligent and proper.
Moreover, he has also breached section 181 as he failed to ensure good feet. His acts were far
from being accruing positive results for the company and has been indulged into the availing
of personal benefits. Moreover, he failed to disclose the true structure of the funds that has
been designed by him to the investors and the shareholders. Hence, Mr Daly is said to have
contravenes section 182, 183, 184 and 181 of the Act.
Question 2
Other than Mr Daly, other directors in the company who has also breached their duties as a
director of the company. They also withdrew money from the funds of the company to assist
their own needs (www.abc.net.au, 2019). They have been involved in the misappropriation of
the funds of the company along with Mr Daly by failing to prevent him from indulging into
such an activity. This also amounts to the breach of the directors duties that they are imposed
with by virtue of being the directors of the company. Under section 180 of the Act the
directors are imposed with the duty to maintain due diligence and proper care while acting as
a director of the company. Section 181 of the Act requires the director to ensure their acts to
be in good faith which has the chief objective of availing the advantages position of the
company. Section 182 of the Act restaurant directors from indulging into any activity that
uses their position as a director to derive personal benefit for them and that was still benefit
has been reaped at the cost of the detriment of the company. Under section 183 of the act the

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directors are bird from utilising any information that has been accessible to them by virtue of
their position as a director in the company personal benefit and affecting a loss towards the
company. Under section 184 of the act the directors are prohibited from making use of their
designation in the company for the purpose of causing abuse to the company and it's
shareholders. Under section 191 of the act the directors I required to furnish all the
information in relation to the management of the company to the shareholders. Having
assisted Daly in all his endeavours and being supportive of all his acts for the purpose of
availing personal benefits has rendered all the other directors to have breached their duties as
a director of the company. One of these directors has withdrawn money from the fund for his
daughter’s wedding and another has appropriated money from the funds for settling the
disputes with his ex wife. This will render both the directors to be liable for the breach of
their duties as a director.
Question 3
A company will be rendered as insolvent if it loses its capacity to payback all its debts in
full satisfaction out of its assets. In this case the company was having an inability to make
payment towards its taxes as well as the loans. It has exhausted all the Investments that has
been availed by several investors. On being exhausted with all the funds that has been availed
investment the company father borrowed money from the lenders. This fresh investment
money has been utilised for the purpose of paying out the old investors. This can be best
described as a ponzi scheme. This has left no money for the new investors to be paid out. All
these were affected by the directors and all the directors were aware of this scheme. This can
be construed as an activity that causes the company to become insolvent. Hence, it can be
stated that the directors were involved into insolvent trading (www.abc.net.au, 2019).

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Question 4
Under section 588G of the Corporations Act 2001(Cth) a director of a company is
restricted from proceeding with any activity that has the effect of putting the company into
insolvency. In this regard it can be stated that the mere probability of the company of
becoming insolvent if any action has been taken will be treated as an activity causing
insolvency. Under this section the directors are likely to incur a civil liability on the event of
indulging into insolvency trading. Section 588GA has been inserted in this Act for the
purpose of providing a defence to the directors who has incurred liability under section 588G.
For the purpose of seeking resort under this section the directors are required to establish that
the action that has been taken by them which has caused the insolvency has been committed
with a good faith to ensure and advantages position for the company as well as the creditors
under the given set of situation. For the application of this section, needs to be proved by the
director that their action has been undertaken for the purpose of ensuring the benefits of the
creditors even if the company has been put under the verge of insolvency. Under this section
the directors of this case has the scope of claiming their actions to have been backed by the
assurance of yielding the benefits of the investors as the same has been availed by them to
pay out the debts of the old investors (www.abc.net.au, 2019). However, this cannot be
treated as a valid ad proper action to be taken under the given circumstances.
Question 5
Under section 588GA of the Act, the directors will be required to be imposed with certain
restrictions while availing resort under this section extending safe harbour rule. Firstly any
director seeking resort on the deception need to establish that the course of action he has
adopted, after being conceived with the suspicion that it might lead to insolvency for the
company, was the best course of action, in his belief, in that set of circumstance. Secondly the
director who has been striving to seek protection under this section needs to establish that any

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debt that he has incurred by way of insolvent trading has been incurred by him to ensure the
best interest pertaining to the company. Thirdly the protection under this section will not be
available to the directors if it has been evident that the directors have incurred a debt while
they has the contention that the company was unable to pay remuneration belonging to the
employees while company was still solvent. This cannot be availed by the directors in this
case as they has acted for the purpose of ensuring their own benefits and not the benefits of
the company and the investors (www.abc.net.au, 2019).
Reference
www.abc.net.au (2019). Document shows concerns about board culture inside billion-dollar
financial advice firm. [online] ABC News. Available at: https://www.abc.net.au/news/2018-
09-21/financial-advice-company-linchpin-lied-to-asic-document-suggests/10287240
[Accessed 18 May 2019].
www.abc.net.au (2019). 'It's been brand damaging': Investment fund chief denies claim he
used funds to pay for daughter’s wedding. [online] ABC News. Available at:
https://www.abc.net.au/news/2018-08-24/company-directors-borrow-money-from-clients-as-
asic-investigates/10157236 [Accessed 18 May 2019].
The Corporations Act 2001(Cth)
Austlii.edu.au. (2019). Australasian Legal Information Institute. [online] Available at:
https://www.austlii.edu.au [Accessed 18 May 2019].
The Stake Man Pty Ltd v Carroll [2009] FCA 1415
Austlii.edu.au. (2019). Australasian Legal Information Institute. [online] Available at:
https://www.austlii.edu.au [Accessed 18 May 2019].