Insolvent Trading: Duties, Safe Harbour Defence, and Liability of Directors

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Contents
Part A........................................................................................................................... 2
1. Is the duty to prevent insolvent trading a fiduciary duty? Why or why not? Give
Reasons...................................................................................................................... 2
2. How does the safe harbour defence s588GA operate?..........................................................3
3. Is section 588GA is different from the business judgment rule s180 (2)?..................................3
4. Are there any restrictions on the operation of the s588GA defence? If so, what are they?..............4
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?............................................................................ 4
Part B........................................................................................................................... 5
1. Did Mr Daly breach any directors’ duties? If so, which ones and how?....................................5
2. Did any of the other directors breach their duties? If so, who, which duty and how?.......................6
3. Do you think the company was trading while insolvent?........................................6
4. If the company was trading while insolvent – are there any defences..........................................7
available to Mr Daly and/or other directors? If so, what are they?.................................................7
5. Would the new ‘safe harbour’ defence assist the directors? If yes, how? If no, why not?..................7
References:................................................................................................................ 9

Part A
1. Is the duty to stop insolvent trading a fiduciary duty?
Why or why not? Give Reasons.
A fiduciary duty is a duty in which any individual or corporation is under the obligation that they
have to put the interest of another individual as a primary interest and the interest of their own as
a secondary interest. This duty arises on the basis of trust and confidence of the relation among
the individuals, patient- doctor, director and their companies. The fiduciary relationship imposes
the fiduciary duty among these people and corporation... it is stated by the Sampford, Coghill
and Smith.
Section 588 G of the Corporation Act imposes the duty of the director of a corporation to stop
the company form insolvent trading. If the company is insolvent and still trading whether the
company traders try to save the company or otherwise, Director of the company will be
accountable for the Civil and Criminal offence... (Bottomley, Hall, Spender and Nosworthy,
2017)
Director of the company holds freedom at the same time carries countless responsibilities. It is
the implied duty of the director that they should know the all amended laws of the Corporation
Act 2001 and must be updated with the monetary situation of the Company. When the company
became insolvent Director and the duties of the Director immediately come under the inspection.
As per the law of Corporation Act, directors prevent the corporation from trading at the time of
the insolvency of the company and for the balance of this duty directors maintain the two
challenging interests of the creditors and the liability of directors but they have to put the creditor
interest as a primary and director’s liability as a secondary interest, this is the reason that the duty
to stop the insolvent trading is a fiduciary duty of the Directors (Rodgers Reidy, 2016).

2. How does the safe harbour defence s588GA operate?
Section 588GA of the Corporation Act 2001 a safe harbour law defence is very recent which was
started on 2017, September 17. Clause 1 of the Sec 588GA defends the liability of directors for
insolvent trading if directors are suspicious that company could turn out to be insolvent or at
present insolvent, and started doing things reasonably for the protection of the company’s
outcome like the instant nomination of the liquidator. It is not important in this defence that the
action of the directors implemented. For the Safe Harbour defence foremost important is that
director of the company attaining the assistance from the suitably skilled body.
For the defence of the section 588GA the burden of proving Safe Harbour is on the directors.
They have to produce sufficient evidence to prove that they were taking actions for the
protection of the outcome of the corporation. For this defence they have to prove that there was
no dishonest intention of the directors in the insolvency trading of the company because safe
harbour defence operates only in the case of civil liability where director took active steps for the
outcome of the company, it does extend in the case of criminal liability of directors (Corporation
Act 2001, sec 588GA (3))
3. Is section 588GA is different from the business judgment rule s180 (2)?
Section 588GA is slightly different from the Section 180(2) of the Corporations Act as Section
180(2) generates the defence of the directors for the statutory duty towards the corporation and
for the privileges under the common law, if directors or other company officers create any
judgment in integrity for an accurate determination and they have no peculiar interest in making
judgment. (Section 180(2) is the replication of Safe Harbour).
The Treasury Laws Amendment (2017 Enterprise Incentives No. 2) Bill 2017 insert section
588GA in the Corporation Act, 2001 I which the defence given to the director is safe harbour