Corporation Law: Duties and Liabilities of Directors

This document discusses the general duties and liabilities of directors under the Corporations Act 2001. It covers topics such as fiduciary duties, safe harbor provision, and restrictions on insolvent trading. The document also analyzes a case study involving a director's breach of duties and the liability of other directors.

Running head: CORPORATION LAW
CORPORATION LAW
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Part A
Answer 1
The Corporations Act 2001 (Cth ) of Australia provides the general duties of the directors
of a company in its different sections (Horne, 2017). These general duties as provided under the
act are often called the fiduciary duties as they are developed from relation of mutual trust, faith
and responsibilities towards each other (Sollars & Tuluca, 2018).
The said Act enumerates four kinds of duties for the directors which include a duty of
diligence and care, a duty to act in good faith, a duty not to misuse position and a duty of not
using any information inappropriately.
Section 180 of the said act gives that the director has a duty to act with a duty of care and
diligence like a reasonable person. The duty of acting in good faith as depicted in section 181
states that the director of a company must act in good faith for incurring best result for the
company. This duty is often regarded as the duty of trust together with fidelity. Section 182 of
this act elucidates that a director must not ever misuse his position to incur any personal interest
for himself or for other causing detriment or loss to the company. On the other hand, section 183
elaborates that any information received by a director because of his position shall never used by
such director for having any personal gain or for others but not for the company resulting loss to
such company.
Apart from these duties discussed above, the director also has a duty of not involving into
and conducting insolvent trading. This has been provided is section 588 G of the aid act. This
duty of not involving into insolvent trading is often termed as a type of fiduciary duty of the
directors of any company. The duty to prevent insolvent trading is a duty of the directors to

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secure and safeguard the interest of the creditors, stakeholders and investors of the company
mainly. If any company is involved in insolvent trading, the interest of the creditors, stakeholders
and the investors are mainly going to get hampered as they might not get back the appropriate
output for their investments. As said above the fiduciary duty is based on mutual obligation,
faith, fidelity and reliance. The directors must take care of the fact that their act must not hamper
the interest of the stakeholders, investors or creditors together with that of the company. this duty
is based on confidentiality between the directors on one side and the stake holders, investors,
creditors on the other side. It is in the hands of the director their interest as well as that of the
company lie. When a director is involved in insolvent trading, then the interest of the company as
well as that of the stake holders, creditors and investors are at stake.
Thus, the duty to not getting engaged in trading during insolvency of the company or
when the company is approaching towards insolvency as given in section 588 G of the said act is
definitely a fiduciary duty which the directors have towards the stake holders, creditors and
investors of the company (Sollars & Tuluca, 2018).
Answer 2:
The Corporations Act 2001 (Cth) introduces the section 588 GA comprising of the safe
harbor provision by amending the act on September, 19th of the year of 2017 (Horne, 2017). This
section was introduced by the legislature with a view to provide protection to the directors
against insolvent trading. As enumerated in section 588 G of the Act, the directors shall not
involve in insolvent trading as it is against the interest of the company as well as of the investors,
creditors and share holders of that company. The directors will be personally liable for any loss

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incurred by the company and others for conducting trading during the insolvency of the company
or when it is gradually approaching toward insolvency (Marsh & Roberts, 2017).
The amendment of the act by introducing the safe harbor method is intended to protect
the directors from their personal liability and to encourage them to take an initiative to
restructure the company when it is already insolvent or going to be insolvent. The underlying
principle of this shield is encouraging the directors to take innovative and modern measures to
overcome the insolvent stage of the company and not forcing them to sit idle and rely on the
traditional approach of voluntary administration of the company (Brotchie & Morrison,2017).
The section 588 GA (1) of the act states that section 588 G (2) cannot be applied to a
director and a debt unless two criteria are fulfilled. The former is that at any point of time, when
the director can assume that the company is already insolvent or going to turn insolvent very
soon, then he had attempted to or already taken any action that can be expected to give a better
result for the company than by appointment of the administrator or liquidator instantly. The other
criterion is that the debt incurred by the company due to such action of the director directly or
indirectly during the time beginning at that time and ending at the earliest of any of the following
times; when the director did not able to take any action within a reasonable time after that time,
or when the directors stopped to take any further action, or when the action made by the director
stops to provide any reasonable and better result of the company or when an administrator or
liquidator is appointed for the company.
Answer 3:
As per the provisions laid down in the Corporation Act 2001, safe harbor method is
employed to provide protection to the directors against personal liabilities for doing insolvent

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trading (Horne, 2017). It is provided in section 588 GA of the said act whereas the section 180
provides the business judgment rule to be applied by the directors. Section 180 provides that the
officers as well as the directors of a company are required to perform their duties with care and
diligence (Bainbridge & Connor, 2016). This particular rule is used to prohibit unnecessary
restrictions on the acts of an entrepreneur. The officers or the directors are bound by this rule
such that any judgment taken by it must be executed with care and diligence for aiming the best
outcome for the company. In order to make use of the best judgment rule, the directors or the
officers must not act to gain any personal interest or benefits and must believe that the decision
or judgment taken by him can be reasonably presumed to be perfect and it is for the best interest
of the company.
The main difference between the section 180 (2) containing the business judgment rule
and section 588 (GA) consisting of the safe harbor method is that the former is applicable to
directors as well as the other officers of the company whereas the latter is applicable to only the
directors (Bainbridge & Connor, 2016). The former is the rule for taking any decision or
judgment for the best result of the company whereas the latter gives guard against personal
liabilities of the directors for insolvent trading.
4.
The restrictions on the application of the defence of safe harbor are provided by section
588 GA (4) and section 588 GA (5) of the Corporations Act 2001 (Horne, 2017). This defence of
safe harbor is unavailable when the concerned company does not operate in compliance with its
duties to pay for the entitlements of its creditors and employees or to supply with returns ,
notices, statements or other records as per the taxation laws or cannot perform the duties within 1

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year after such debt is brought into and when the directors are not able to perform the duties
being the directors of the company after the debt has resulted (Low & Low, 2018).
5.
Under the provisions enumerated under the Corporations Act 2001, section 588 (G)
provides that directors shall not trade which can result into incurring of debts when such
directors can reasonably believe that the company is already insolvent or has high chance of
turning insolvent (Horne, 2017). When the company cannot pay off its creditors, it is denoted as
an insolvent company. An insolvent company is of two types; firstly when the company is
currently not being able to pay off its debts to its creditors and secondly, when the company in
near future, will not be able to repay its debt. Usually, the directors of the company have a main
responsibility to keep the interest and benefits of the creditors at high esteem. Moreover, they
must ensure that the creditors shall not be deprived of their interest. When a company becomes
insolvent, it is the duty of the directors that shall not involve into any transactions that may have
ill effect on the interest of the creditors. But as per the provisions enumerated in section 588 GA,
the directors are protected against their liabilities if they perform insolvent trading when the
company is insolvent or may proceed towards insolvency.
The safe harbor defence was introduced after the amendment of the said act in 2017 to
enable the directors of a already insolvent company or going to be an insolvent company to keep
the control of the company in their hands. This defence allows them to make interaction with the
creditors, investors and stake holders of the company and take their advice to get under control
of the situation of the company. This provision of safe harbor allowed the directors to take

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measures to overcome the present state of the company instead of leaving the company in the
hands of the liquidator or administrator.
Voluntary insolvency denotes a condition when a debtor whether an individual or a
company denies its duty to pay off the debts to the creditors by overlooking its liabilities. The
safe harbor defences included under Division 3 besides giving protection to the directors also
gives them an option to mis utilize its power and position by defrauding the creditors. This
provision of safe harbor has formed loopholes for the creditors, investors and even shareholders
where they can be befooled easily. The directors can arbitrarily use this harbor without any
adequate reason and involve into trading in spite of knowing that the company is insolvent or
going to be so. This may lead them to perform more insolvent trading not for the betterment of
the company but for their personal gain as the creditors will be unaware of the insolvency
scenario of the company. Thus the creditors may incur loss due to unnecessary trading of the
directors during the insolvency of the company.
Part 2:
1.
After hearing the podcast, it was found that Mr Peter Daly being the executive director of
the Linchpin Capital was involved in the one of the biggest financial scams in the history of
Australia. The Corporations Act 2001 provides various duties and liabilities of the directors of a
company in its various sections (Horne, 2017).
From the facts of the given case, it was found that Mr Daly has breached hi duties as the
director of the said company. He misappropriated the company funds for his personal benefits.
He did not act in good faith carefully and diligently for achieving the best result for the company.

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he even misled the investors of the company as they were unaware where the funds invested by
them were actually going. The investors were unsure whether they will get any returns of their
investments. Moreover, in the Product Disclosure Statement of the company, he did not provide
adequate information. The Disclosure contained polished and professional terms to keep the
investors in darkness as the actual information was not provided in it. The company even created
Ponzi scheme with approval from Mr Daly. Thus from the above mentioned facts it is found that
Mr Daly has violated several duties of a director as provided under the said act. His acts lacked
transparency and had compliance problem. He was even responsible for insolvent trading for
gaining personal benefits.
From the facts stated above, it is seen that Daly has violated the general duties of a
company director as laid down in sections 180 to 184 of the said act as he did not act with care
and diligence to achieve the best result of the company rather he was involved in acts that
resulted personal benefits at the cost of the interest of the company. He breached section 588 G
as he caused insolvent trading for personal interest. He even infringed section 344 as he failed to
comply with the financial records and documents. He breached section 188 also as he failed to
inform ASIC (Ramsay, & Webster, 2017). As per section 1.1 it is said that the assets of the
company must be used for company only. But Daly withdrew funds for his own causes that
included foreign trip cost, paying credit card bills and others.
2.
The other directors of the company were liable for breach of their duties as directors of
the company. They were liable for misappropriating the funds of the company. One of the
directors used company money to fund his daughter’s wedding. Another used company money of

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about 3000 dollars to solve a divorce case with his wife. These two directors allowed Daly to use
cash of company and did not prevent him instead they defended him for his act. They are liable
for issuing the Ponzi scheme, not providing information to ASIC and causing insolvent trading
for achieving personal advantages. Thus they are also liable for infringing sections 180 to 184,
188, 191, 344 and 588 G.
Thus, the directors of the company had breached the general duties as given under the
said act as they did not act with care and diligent for incurring the best result of the company.
They use their position to collect money from the investors. They neither maintain financial
records nor Annual financial reports and director’s reports.
3.
As per the facts of the scam heard from the Podcast, there is no doubt that the company
was involved into insolvent trading. It is clear that the company’s financial scenario was
degrading gradually. It was collecting money from the investors by giving them false assurance
of returning their principal money with attractive interests. Moreover, it is seen that the emails
dated March 2017 provides that the company was running out of cash and was unable to pay its
loans and taxes. Paul Green, a forensic accountant after going through the IIOF documents
expressed concerns regarding the solvency of the capital fund of the company. The directors
were aware of the fact that the funds were reducing day by day, still they kept on taking out the
money from the company accounts. Their aim was to repay the older investor from the money of
the new ones. In this way, they kept the company collecting money from the investors. They
knew that in this manner, the company will run out of money and become absolutely insolvent
soon. These proved that the company was involved in insolvent trading.

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4.
For involving in insolvent trading, the directors can raise the defences as provided in the
relevant section of the Corporations act 2001. They can easily claim that there was no indication
that the company can turn into insolvent (Brotchie & Morrison, 2017). They can argue that when
the debt was incurred by the company, the company was in solvent condition, for which they
were involved into trading. They even allege that they were in to such practice to restructure and
achieve the best result for the company (Brotchie & Morrison, 2017). They can argue that they
kept on collective money to repay its older investors. If they do not allow such, then the funds of
the company will be locked up in the hands of the liquidator or administrator. Apart from this, it
is seen that though Daly had withdrawn cash out of company accounts, he was returning it from
its salary. The other directors were also ready to return their loans in future. They can even argue
that they were not in good physical condition or have some personal issues for which they could
not take active participation in the operation of the company.
Thus all these can be used as defences by the directors of the company to defend their
acts of insolvent trading.
5.
Section 588 GA of the Corporations Act 2001 (Cth) provides a shield to the director
against their acts of insolvent trading (Brotchie & Morrison, 2017). The directors with an aim to
protect themselves from their personal responsibilities, can claim the defence as given under the
principle of safe harbor in the said section. The directors of the said company can argue that
when they were able to suspect that the company was turning insolvent, they took measures to
prevent it. They tried to restructure the company for getting better result. They were involved

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into trading in spite of being insolvent as they want to restructure the plan of the company for
achieving better result of the company. They can even put up in defence that instead of giving
the control of the company to an administrator or liquidator they try to take some innovative
measures to cause better output for the company.
But in reality, from their acts, it will be difficult for them to avail the protection under
section 588 SA of the said act as they are more involved to gain personal profit and not overall
gain of the company. it will very difficult for them to prove that the activities done by them were
for the better output of the company as they were more interested to gain personally.

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References:
Bainbridge, W., & Connor, T. (2016). Another way forward? The scope for an appellate court to
reinterpret the statutory business judgment rule.
Brotchie, J., & Morrison, D. (2017). Insolvent trading and voluntary administration in Australia:
economic winners and losers?. Accounting & Finance.
Horne, A. (2017). Call for review of Corporations Act. Governance Directions, 69(8), 450.
Low, C. K., & Low, T. H. (2018). The Business Judgment Rule: A Safe Harbour for Directors?.
Marsh, S., & Roberts, S. (2017). Personal liability for insolvent trading: Company directors find
berth in safe harbour. Governance Directions, 69(10), 611.
Ramsay, I., & Webster, M. (2017). ASIC Enforcement Outcomes: Trends and
Analysis. Company and Securities Law Journal, 35(5), 289-321.
Sollars, G. G., & Tuluca, S. A. (2018). Fiduciary Duty, Risk, and Shareholder Desert. Business
Ethics Quarterly, 28(2), 203-218.
The Corporations Act 2001