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Corporate Law IRAC - Case Analysis Hall v Poolman
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Added on 2020-04-01
Corporate Law IRAC - Case Analysis Hall v Poolman
Added on 2020-04-01
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HALL V POOLMAN2IntroductionThe directors of the company have being given the responsibility to work on behalf of theshareholders and run the affairs of the company to the best of manner. This responsibility hasbeen given to the directors through different provisions of the governing act, i.e., theCorporations Act, 2001 (Cth). This act is applicable upon all of the companies, who have theirbusiness or operate out of Australia, unless specifically exempted (Baxt, 2007). Amongst thedifferent duties of the directors is the duty to prevent insolvent trading. However, this does notmean that the directors have to stop taking the risky decision, just because a risk element ispresent, for the fear of breach of provisions of this act. They can make a sound business decision,provided it is “sound”. In other words, such a decision has to be taken after careful analysis andobservation of the present facts (Paolini, 2014). Hall v Poolman (2007) NSWSC 1330 gives anexcellent explanation of the use of insolvency provisions and the defence presented through theCorporations Act (Morrison, 2010). This discussion presents an analysis of this case, where theissues and rules of the case have been separately broken down and have been applied to the factsof the case. Background of the CaseA winery and a vineyard were owned by Reynolds Group of companies near New South Wales’sOrange. The group entered into a voluntary administration in August 2003 and afterwards, inNovember 2003, went into voluntary liquidation. When the group entered into liquidation, thesecured creditors collectively owed around $30 million and the unsecured creditors stood at $99million where there were no assets and even the funds on hand were limited. The fund pool was
HALL V POOLMAN3so less that the funds were insufficient in covering the costs of the initial voluntaryadministration. Consequently, there were very less chances that a dividend could be paid to thecreditors and also, the funds were not available to pay the costs of the liquidator. The directors ofthe company, during October 2002 to August 2003 were the defendants Peter Poolman andMalcolm Irving (Trickey, 2016). After the further investigation was conducted into the group, the liquidators applied to pursue thedirectors of the group. And so, the liquidators went ahead with the examination of the directorsand the proceeding liquidation based on the liquidation funding agreement. Even after the stepswere taken to initiate the proceedings against the directors of the group in the Supreme Court ofNew South Wales, it remained a highly unlikely prospective particularly for the outcome for thedirectors being a success, and it was also unlikely that the creditors would receive a dividend;further, even if a dividend was available, it would be minimalistic. And so, any fund which wasrecovered pursuant to liquidation would go mostly towards the fees of the liquidator (Trickey,2016). IssueThe key issue which was examined under this case was the liability for the decisions which weremade when the business was facing financial hardships, involving the insolvent trading of thedirectors and exercising discretion in relieving the director from the liabilities arising frominsolvent trading (Lewis, 2010).
HALL V POOLMAN4RuleThe companies are given the status of separate legal entity in Australia and each company hastheir own rights and own liabilities (Latimer, 2012). This has been upheld in a number of cases,for instance Walker v Wimborne [1976] HCA 7 and Industrial Equity Ltd v Blackburn [1977]HCA 59; (1977) 137 CLR 567 where it was stated that in case of group companies, there is nojustification for summing up the liabilities of the group companies as every company is aseparate legal entity (Austlii, 2007). Section 588G of the Corporations Act, 2001 is a key section covering the duties of the directors.As per this section, it is the duty of the director to prevent the insolvent trading by the company(References Armstrong Lawyers, 2007). The section becomes applicable when the companyincurs a debt at such time when the individual was a director; where the company was insolventat that particular period of time or became insolvent as a result of incurring such debt; and therewere reasonable grounds for doubting the solvency of the company or would become insolvent.In case the director fails in preventing the company from incurring such debt, where theindividual was aware or had the grounds to suspect the solvency of the company and where aprudent individual would be aware of such condition having similar position in the company,section 588G(1) is deemed to be breached on the basis of this subsection (2). And this breachinvites civil penalties based on section 1317E(1). Even criminal liabilities are attracted for breachof subsection (1), pursuant to subsection (3) which states that when the company incurs a debtwhen it was insolvent and where the director suspected of this condition of the company and stilllets the company incur the debts, where the failure to prevent the company from incurring thedebt was dishonest, criminal liability has to be attached (WIPO, 2015).
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