Corporation Law: Duties and Responsibilities of Directors

This article discusses the general duties and responsibilities of directors under the Corporations Act 2001. It covers fiduciary duties, duty of care and diligence, duty of good faith, duty to prevent insolvent trading, and the safe harbor provisions.

Running head: CORPORATION LAW
CORPORATION LAW
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Part A
Answer 1
The Corporations Act 2001 discusses with the general duties entrusted to the directors in
its various sections (Horne, 2017). Those general duties are often called as the fiduciary duties
because the basis of those duties is corresponding faith, respect and liabilities towards one
another (Huebner & Klein, 2015).
The Corporations Act 2001 elaborates mainly four duties for the directors of company as
given in the case of ASIC v Cassimatis (No 8) [2016] FCA 1023. Those are duty of care and
diligence, good faith, not to improperly use position and not to use information improperly
(Horne, 2017).
The duty of care and diligence provides that the director must act with a standard degree
of care and diligence which can be expected from a reasonable person (section 180 ) as seen in
ASIC v Cassimatis (No 8) [2016] FCA 1023.. The duty of good faith needs a director to act and
perform his duties in good faith for an adequate reason in the best interest for the company. Such
duty is a duty of fidelity and trust imposed by section 181 of the Corporations Act 2001 as well
as by the common law (Horne, 2017).
The duty of not to use position improperly requires that a director must not gain any
undue advantage for himself or others or to the detriment to the company (s 182).
The duty of not using any information inadequately requires that the directors must not
use any information they gain in their tenure as directors to gain any advantage for them or
others causing detriment to the company. (s 183).

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Apart from the four main duties of the directors, there are some additional duties and
responsibilities of the directors under the provisions of the said act. Those are as follows.
The directors are under a duty not to do insolvent trading under section 588G which says
that directors have the duty to assure that the company must not trade while it is or they can
expect that insolvency may occur as seen in case of Spies v R (2000) 173 ALR 529.
Moreover, the directors must also take reasonable steps to ensure that the company must
always comply with the obligations listed under the provisions of the Corporations Act in
relation to keeping of financial reporting and records ( s 344) (Horne, 2017).
Moreover, the directors shall also disclose information and matter related to the affairs of
the company in which such directors have personal material interest (s 191) particularly in
relation to section 208 and section 205G.
Further, the directors have duty to lodge the necessary information with ASIC as given in
section 188 (Brown, 2016).
Apart from these, the continuous disclosure of information to the market in case of the
information that are not usually available and which affects the share price of the company as
given in section 674.
Of all the duties mentioned above, the duty to prevent insolvent trading laid down I
section 588 is one of the fiduciary duties that the directors have towards the investors and
stakeholders of the company (Huebner & Klein, 2015). The fiduciary duties are based on mutual
trust, obligation and fidelity. The director have obligation towards the investors, stake holders
and other members of the company such that his act cause no loss or detriment to their interest as

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well as to the interest of the company. It based on the principle of mutual trust between the
directors and the creditors. If the directors allow insolvent trading, then the interest of the
creditors will be at stake as observed in Walker v Wimborne (1976) 137 CLR 1. Hence, the duty
to prevent insolvent trading as given in section 588 is a fiduciary duty as per the provisions of the
said act.
Answer 2:
On 19th of September 2017, the Corporations Act (Cth ) introduces the safe harbour
provisions under section 588 GA by amendment (Horne, 2017). As per Harris, the amendment
created the defence for directors against any insolvent trading regarded as the safe harbor
defence which was incorporated to encourage the directors to make an attempt to restructure the
company which is at the risk of insolvent trading instead of placing the company into the
voluntary administration at the first instance of trouble ( Dunn, 2017).
The said section 588 GA (1) provides that the duty given in section 588 G(2) will not be
applicable to a director and a debt if two conditions are complied. The first condition is that at a
particular time after the director is able to suspect that the company is or can be insolvent, then
he has taken one or more course of action that can be presumed to result into a better result for
the company than appointing the administrator or liquidator immediately. The second condition
is the debt is incurred by the company directly or indirectly in relation to any such action taken
by the director during the period that begins at that time and ends on the earliest of the following
time; the end of reasonable period after the time that the action is ended provided the director is
unable to take the action in such time or when the director stops to take the course of action or
when the action is unlikely to lead to a better result than the immediate appointing an

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administrator or liquidator or an administrator or liquidator is already appointed. The act does
not however provide any further interpretation on the reasonable time.
Answer 3:
Under the Corporations Act 2001, the directors are given a protection against their
personal liabilities by providing the defence of safe harbor to insolvent trading (Horne, 2017).
On the other hand the business judgment rule is applicable to section 180 which provides that the
director or any other officer has the duty to act with care and diligence (Low & Low, 2018). It is
seen in the case of Re Centura Global Holdings Pty Ltd [2015] NSWSC 1744. This rule is
introduced to prevent unnecessary limitations on the entrepreneurial acts. As seen in the case of
ASIC v Mariner Corp (2015) 327 ALR 95 at [444], the director or the offiecr who makes the
business judgment rule is required to act carefully and diligently in relation to a judgment under
section 180(2) if such judgment is made in good faith and also for a good reason, when the
director or such officer does not have any personal interest in the subject of the judgment, when
he believes that judgment is reasonably perfect and he rationally believes that such judgment is
for the best purpose of the company (Low & Low, 2018). This has been observed in the case of
EPA v Phillip Foxman [2015] NSWLEC 105.
The difference between both the sections is that section 180 (2) is applicable to directors
and even other officers of the company whereas section 588 (GA) provides guard to the directors
only. The business judgment rule is the judgment taken by the directors or officers of the
company (Low & Low, 2018). On the other hand, safe harbor provision allows a guard to the
directors against the insolvent trading.
4.

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Sections 588 GA (4) and 588 GA (5) of the Corporations Act 2001 provides that the
restrictions on the applicability of the safe harbor defence (Horne, 2017). The defence is not
available when the company does not comply with its obligations to pay the entitlements of its
employees or to give returns, statements, notices or other necessary documents as provided under
the taxation laws or has failed to comply with the duties within one year period when such debt
was incurred and where the director are unable to comply with any of the obligations related to
the company, after the debt incurred, and that such failure comprises of less than substantial
compliance with such obligations.
5. As per the provisions of the Corporations Act 2001 ( Cth ), the directors must not get
involved into any dealings that can incur debts when they have reasons to presume that the
company is already insolvent or has high probability to turn in to becoming insolvent (Horne,
2017). A company when becomes unable to pay off its debts to its creditors is known as
insolvent company (Marsh & Roberts, 2017). There are two types of insolvency; when the
company is presently unable to pay its debts or it will be unable to pay its debts to its creditors in
future. The directors of a company have a primary duty to keep the interest of its investors and
creditors above everything and they must ensure to keep them safely as observed in the case of
Kinsella v Russell Kinsella Pty Ltd (in liquidation) (1986) 4 NSWLR 722. If they trade during
the insolvency of the company, they will be held personally liable. Hence it is their duty not to
involve in insolvent trading as seen in the case ASIC v Rich 50 ACSR 500. However, under
section 588 GA they are given a protection when they are involved in trading in spite of knowing
that the company is insolvent or has high chance of turning insolvent.
The safe harbor defence given under section 588 GA of the said act had been
incorporated to allow the directors of an insolvent or going to be insolvent company to keep the

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hold of the company in their control (Marsh & Roberts, 2017). Previously, before this
amendment, when a company becomes insolvent, the directors have no power or authority in
their hands and the control of the company goes into the hands of either a liquidator or
administrator. Moreover, this has been introduced to motivate the directors to take innovative
measures to make an attempt to change the board room scenario of the company (Horne, 2017).
Such defence allows them to interact with the investors, shareholders or creditor of the company
and take measures overcome the state of insolvency of the company instead of on the liquidators
or administrators ( Fox, 2015).
Voluntary insolvency means a situation when a debtor like an individual or the company
refuses to repay its creditors by ignoring its liabilities. The safe harbor defence as incorporated in
the Division 3 has also given an option to the directors to misuse this protection for their
personal benefits (Marsh & Roberts, 2017). This defence has created loopholes in to which the
creditors can jump into unknowingly. Thus the directors can arbitrarily use this protection
without any justified reason. This may result into more insolvent trading of the directors and thus
the creditors will be befooled. The creditors may incur losses because of the fraud committed by
the directors. This safe harbor defence will allow the dishonest directors to involve in
transactions during insolvency of the company, thus the security of the creditors as well as the
investors will be at stake as they will be having practically no idea that they are investing in an
insolvent company.
Thus, the changes brought in Division 3 under the said act, have these ill effects on the
company as they will impose more chances of voluntary insolvencies in the country (Horne,
2017).

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Part 2:
1.
As per the facts hear in the podcast, one of the biggest finance scandal was committed by
Mr Peter Daly. He was the executive director of the Linchpin capital company which has two
subsidiary branches. The Corporations Act 2001 provides the duties of the directors and the
directors are bound by these duties (Horne, 2017).
From the facts of the given case, it is found that Mr Daly has misappropriated the funds
of his company for personal reasons. He also did not act in good faith for achieving the best
interest for the company. He misled the investors and kept them in darkness. The investors were
unaware where their money was going and whether they would be getting back their returns. He
did not provide proper information to them in the Product Disclosure statement of the company.
it contained only polished, professional terms but actually they are vague terms to mislead the
investors. He was even liable for creating Ponzi scheme to defraud the customers. Thus from all
these it can be said that Mr Daly has violated the provisions of the Corporations Act. He
breached the ethical duties contained in the said act as the director. His acts being a director of a
billionaire company lacks transparency and has severe compliance issue. He was even involved
into insolvent trading.
Thus from the above discussion, it was observed that he has breached the general duties
as contained in sections 180, 181, 182 and 184 of the Corporations Act 2001 as he did not
perform his duties with care and diligence in good faith and improperly use his position and
information for personal gain causing detriment to the interest of the company. Moreover, he
breached section 588G as committed insolvent trading. He did not take reasonable steps for

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ensuring that his company is complying with all the financial records and reporting as given in
section 344 of the said act. He did not lodge information with ASIC and hence breached section
188 (Brown, 2016). He breached section 1.1 which says that all the assets of the company must
be used for the purpose of the company. But he used funds of the company to sponsor his foreign
trip to the Greek Island, to pay his credit card bills and for other personal reasons. Thus he was
liable grossly misappropriating the company’s funds.
2. The other two directors like Mr Peter Daly, of the two subsidiary companies, the financial
advice business called the Beacon Group and an investing fund called Investport Income
Opportunity Fund (IIOF), of the Linchpin Capital, were equally responsible for misleading
investors and also misappropriating funds of the company. One of the directors was responsible
for using money for funding his daughter’s lavish marriage. Another used company funds of
3000 $ in order to compensate a ‘cash flow hurdle’ that happened as a result of a dispute related
to separation of property with his wife seeking divorce from her. These two directors do not even
stop Daly from withdrawing 70000 $ from the accounts of the company instead they defended it.
They were equally liable for breaching the ethical duties embodied in the Corporations Act. They
are liable for the Ponzi scheme, not lodging with ASIC and committing insolvent trading
(Brown, 2016). Thus here the fund of the company was used inconsistently for purposes not
related to the company affairs.
Thus it can be said that the other two directors had breached section 180 as they had not
perform their duties and use their powers with a reasonable degree of care and diligence.
Moreover they did not act in good faith hence infringed section 181. Moreover, the directors
have inappropriately used their position for their personal benefits as laid down in section 182.
They misused the position to tamper with the company funds for personal luxury and benefits.

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Moreover, they infringed section 191 as they did not disclose the information of the company
affairs to the investors. Moreover, they have breached section 344 as they did not comply with
the provisions enumerated in Part 2M.2 and 2M.3. They did not keep the financial records.
Moreover, they did not maintain the Annual financial reports and the directors’ reports properly.
3.
From hearing of the podcast, it is seen that the company was greatly involved in the
practice of insolvent trading. It could be easily seen that the financial condition of the company
was going down since 2017 when it was receiving money from the investors with a fake notion
of proper financial conditions and operation of the company. The company has assured its
investors that they are going to get back their returns with lucrative interest. However, it is false.
Moreover, from the activities of the company and its directors, it is revealed that the emails dated
March 2017 showed that the company had practically no cash to repay the loans and its taxes.
Moreover, Paul Green who was a forensic accountant after examining the IIOF records showed
concerns about the solvency of the funds of the company. In spite of knowing that the funds of
the company going down, the directors kept on withdrawing the funds from the company. They
were withdrawing money from new investors to repay the older ones. However, there remained
no money to make return to the new investors. They were well aware that the company was
about to be insolvent soon still they try to withdraw funds. All these showed that the company
had made transactions in spite of knowing that it is going to be insolvent soon. In addition to this,
there appeared a situation when the investors did not get back their hard earned money invested
in the company of Daly which also indicated its insolvency.
4.

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Though the directors were involved in insolvent trading still they can raise the defences
against it as laid down in the relevant provisions of the Corporations Act 2001. They can argue
that there is no presumption that the company was going to be insolvent; they can claim that the
company was solvent in reality when they had incurred the debt and there was no good cause to
believe that the company may convert into insolvent. They can claim that they were involved in
insolvent trading to achieve a better outcome for the company. They collected money from the
new investors to repay the returns of the older ones. They can even argue that if they did not
insolvent trading, the entire control of the company will go in the hands of the administrator or
liquidator. If they do not allow the collection of funds from new investors, the old investor will
be deprived and they will not get any returns for the money they had invested in the company.
Unless they allow such withdrawing of money, there will not be any option available to repay the
loan. Moreover, though Mr Peter Day borrowed about 70000 $ for his personal usage, he was
returning it back by making deductions from his salary. Other two directors were also planning
to return the loan taken by him from the company. Hence all these claims can be put forward as
the defences against the insolvent trading by the directors.
They can even say that the directors were physically ill or have some personal issues for
which they could not take part into the company governance.
5.
In order to escape from their personal liability, the directors can claim the safe harbor
defence as provided under section 588 GA of the Corporations Act 2001. This particular section
provides a shield against the insolvent trading to the directors of the Linchpin Capital (Marsh &
Roberts, 2017). As per the section, the directors can protect them selves from the circumstances

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where they are blamed personally for some particular reasons. The directors can claim that when
they have suspected that their company was close to insolvent trading, they had started taking
measures to achieve company’s better result. They can argue that their measures were taken to
minimize the ill effects that can happen as an outcome of insolvency. They can even claim that
they had altogether reconstructed the plan for ensuring better output of the company. They could
argue that instead of giving the control of the company to the administrator or liquidator, they
tried exercising their authority to hold the control of the company in their hands.
However, in reality, after considering the steps and measures taken by the directors, it
would be difficult for them to avail the safe guard protection for them for insolvent trading as
they were not concerned about the future of the company but their personal benefits ( Dunn,
2017). They will be unable to defend themselves as they were not involved into activities that
were actually done for the benefit of the company as given under the provisions of the
Corporations Act 2001 (Cth).

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References:
ASIC v Cassimatis (No 8) [2016] FCA 1023.
ASIC v Mariner Corp (2015) 327 ALR 95 at [444].
ASIC v Rich 50 ACSR 500.
Brown, A. (2016). ASIC: Better communication, insolvent trading and notices to
creditors. Australian Restructuring Insolvency & Turnaround Association Journal, 28(1),
42.
Dunn, J. (2017). Safe harbour. Company Director, 33(6), 28.
EPA v Phillip Foxman [2015] NSWLEC 105.
Fox, J. (2015). Honest and reasonable director defence. Governance Directions, 67(4), 218.
Harris, J. (2016). Reforming insolvent trading to encourage restructuring: safe harbour or sleepy
hollows?. Journal of Banking and Finance: Law and Practice.
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.
Kinsella v Russell Kinsella Pty Ltd (in liquidation) (1986) 4 NSWLR 722.
Low, C. K., & Low, T. H. (2018). The Business Judgment Rule: A Safe Harbour for Directors?.
Marsh, S., & Roberts, S. (2017). Risk management: Insolvency safe harbour
for'honest'directors. Governance Directions, 69(5), 275.

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Re Centura Global Holdings Pty Ltd [2015] NSWSC 1744.
Spies v R (2000) 173 ALR 529.
The Corporations Act 2001
Walker v Wimborne (1976) 137 CLR 1.