Business Law Report: Insolvency, Director's Duties, and Legal Actions

This report analyzes a business law case involving Mr. Sam Tipping, Mrs. Rosa Tipping, and Phillipa, focusing on the responsibilities of directors during insolvency. It examines the establishment of a general partnership and the legal duties arising from it, including the obligation to manage the insolvency process sensitively and cease trading when a company becomes insolvent to protect creditors' interests. The report discusses breaches of fiduciary duty, wrongful trading, and fraudulent trading, outlining potential consequences such as ineligibility to act as directors, penalties, and imprisonment. It also covers the directors' responsibilities to formulate a statement of affairs, establish a consent procedure, and the consequences of breaching duties, including legal actions, dissolution, and potential personal liability. The report emphasizes the importance of acting reasonably, maintaining accurate records, and avoiding conflicts of interest to fulfill the duty of care. The case study highlights the Australian corporate law's impact on the directors and the consequences of their actions.

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corporation and business structure
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Introduction
It is evident that Mr. Sam Tipping and Mrs. Rosa Tipping are in a general partnership.
The moment they agreed to work together, run SRT together and share the benefits or losses
together , the relationship was established. Despite the fact that the established their relationship
through verbal communication most companies are usually formed formally , with the other
accomplices recording all the assertions in compliance with the articles of organization. The
articles are used to set forward anything that the accomplices wish to incorporate regarding how
the organization will be operated. Indeed, it is ethical since it is allowed by the law . Limited
Companies are broken down the same way they were established . Since the fundamental
position of a general relationship is a consent to share the profits and loses , once the dissolution
is achieved , the general company closes with it . It is evident from this case that contracts might
be very easy to enter , in fact , we usually enter into an agreement simply through various
actions. For instance , most businesses often place small notifications near their entry ways
indicating that , by simply entering the premises you allow to be recorded .
Legal duties
In this cases , Mr. Sam Tipping and Mrs. Rosa Tipping had a huge obligation during the
insolvent liquidation and thus had to manage the entire process sensitively . Failure of acting in a
prescribed manner , their failure to act properly and delegating crucial work to incompetent
employees led to illegal transaction further down the line. The outcome could be a penalty ,
ineligibility of the involved parties or even personal accountability for a certain percentage of the
debts1.
1 Tyler, John. "Negating the legal problem of having Two Masters: A framework for L3C fiduciary duties and
accountability." Vt. L. Rev. 35 (2010): 117.

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Once the organization was considered insolvent , the responsibility of the directors ought
to have shifted from being stakeholders to creditors. Furthermore , once the organization is
considered insolvent , the obligations of the directors becomes much lesser . Therefore , it was
important to cease trading once it is realized that a company was becoming insolvent , in order to
protect the interests of the creditors . Acting with high responsibility during such circumstances
was important in order to eliminate threats of personal liability2.
Stop operations when they realize that the company is insolvent .
The moment the directors realized that the company was insolvent , they had the legal
obligation to stop trading .Phillipa was not supposed to send out any more products , send
invoices or even seek more funds . All the actions that were not in the better interests of the
business creditors led to Phillipa engaging in illegal dealings as indicated in section 214 of the
Insolvency Act 1986. Mr. Sam Tipping and Mrs. Rosa Tipping , as the company liquidators have
the legal responsibility to study the behavior of their employees during the period that led up to
the insolvency. Since wrongful trading was evident , directors were faced by ineligibility , thus
preventing them from operating as company directors for a period of 15 years . In addition ,
since fraudulent trading was proven , Phillipa faced more serious consequences such as
penalties ,penalties and even serve time in prison .
Director’s Responsibility to Formulate Statement of Affairs
This is one of the fundamental roles played by directors during the times of insolvency
with the appropriate handover documents that would bring the IP up to date on the situation. The
documentation is often used to breakdown the existing financial situations of the organization
and Include assets valuation , some of the recent balance sheets , a list of creditors and a
2 Waters, Steven., and Matthew. Reinhart. "Partnerships." SMUL Rev. 63 (2010): 703.

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comprehensive detail of debts . Where the liquidation is mandatory just as in this case , it was
supposed to be the obligations of the official receivers to prepare a SOA.
Establishing a Consent procedure.
In this case , the directors should have planned a meeting of all the creditors . Now
directors were required to convene a consent process which would have been a means of getting
authorization of creditors over the issues as well as the nomination of liquidators. Unless more
than 10% of the creditors oppose , this will be considered as consent to go ahead with the
business.
Breach of fiduciary duty
Atherton et al., indicates that partners in any business have a fiduciary duty , which is the
most important duty a partner might owe. A fiduciary duty can be described as the type of
obligation that business partners have to each other in their business operations. In this case , all
partners owed each other duties to the organization. Phillipe had the duty to act with loyalty ,
fairness and act in good faith . The partners were not supposed to use the company’s money for
their own benefits , and should not have put their own interests first ahead of their business.
Once the partners engaged in self-dealings by diverting revenues to themselves , they basically
breached their fiduciary duty to one another .
However , in order to win this case , the creditors would have to first top proof that the
directors together with Phillipe breached their fiduciary duty and demonstrate a precise
calculation of the money the creditors lost in the process . Often , this would require hiring of an
economist to show the amount of damage that the company incurred . While such cases often
end with civil liabilities such as paying fines , some breaches of fiduciary duty might result in

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criminal liability . For instance , in this case the directors can be imprisoned for diverting
company resources in accordance with Sarbanes-Oxley Act of 2002, which was implemented in
response to multiple financial scandals .3
Additionally , Phillipe might be considered criminally liable for the embezzlement of
business funds . Frederick Franke indicates that “there are multiple breaches of fiduciary duty
that could lead an employee having criminal liability. This includes all forms of self-dealings ,
fraud , criminal insider trading among others .”4The repercussions of what Phillipe committed
might include long prison times , hefty fines among other punitive measures.
It is important to note that partners are supposed to ensure their fiduciary relationship to
one another is maintained the relationship is the one that ought to be honest, good faith and
fairness.5 As a result , it compels the partners to act with high responsibility , the responsibility to
work with the intention of benefiting all partners. In addition, they have the obligation to avoid
exploiting the company through falsification or threats related to the partnership and the
organization6.
Duty of Care
Partners in a business are the managers of all the business operations. In this case , the
obligation of care necessitated the directors to work with reasonability while conducting their
daily operations. Generally, this means that the partners are required to action in a reasonable
manner and without conflict of interests while making important decisions for the organization.
3 Sarbanes-Oxley Act of 2002
4 Frederick Franke,. "Resisting the Contractarian Insurgency: The Uniform Trust Code, Fiduciary Duty, and Good
Faith in Contract." ACTEC LJ 36 (2010): 517.
5 Atherton, Susan , Mark. Blodgett, and Charles . Atherton. "Fiduciary principles: corporate Responsibilities to
Stakeholders." Journal of Religion and Business Ethics 2, no. 2 (2011): 5.
6 Larry Ribstein . "Fencing fiduciary duties." BUL Rev. 91 (2011): 899.

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Both partners had the obligation to show in a claim that they allege fiduciary duty for
such self-dealing and taking advantage in a transaction that involved both parties. In such
situations , an assumption of fraud and unwarranted influence arose and the creditors have the
burden of disproving the presumptions by demonstrating that they acted honestly . The offending
partners were therefore liable for all the losses they suffered through the partnership that were
instigated by bad faith of the partner.
Under the duty of care , it is expected that the partners ought to act reasonably while
directing the association . For instance , it is important to ensure that the partnership keeps a
complete and accurate record for the organization . That being said, if the two directors and
Phillipa acted reasonably prudent , she could have ensured that she maintained appropriate audit
controls that would ensure appropriate accounting and safeguarding of partnership as well as the
assets. According to the business judgement rule , a partner is usually not held responsible off
any choices he/she made in good faith and with sensible care that later become erroneous.
Consequences
When a partner has been accused on breaching fiduciary duty , the creditors have the
right to take legal actions against the directors . Usually, this involves filing civil lawsuits.
Nevertheless, it might be possible that the fiduciary and the other party involved will determine
the resolution of the matter. Taking legal action is a voluntary process that necessitates all the
creditors to come together and have a consensus .If the creditors submit the dispute to the court ,
they would all make a binding decision regarding the issue.
Dissolution

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Since the business had already collapsed as a result of their conducts, dissolution of the
business is the ultimate consequence of the breach .This doesn’t imply that the business is being
dissolved. Instead , they will be required to draft new articles of incorporation as well as new
agreements for all the creditors. In addition , since there was no money at stake , it was important
to consult with the creditors to determine if they are willing to dissolve the partnership to avoid a
lawsuit7.
Legal Action
If the involved parties do not rectify the breach , the creditors have the obligation of
taking legal actions . Since such agreement was binding for the both directors and the creditors ,
it would be necessary to sue and enforce their agreement or nullify your contract. Corporate laws
can slightly vary from one state to another .Therefore , it would be necessary to sue within the
jurisdiction in which contracts were signed unless the contract had a choice of law clause. If such
clauses existed , it would be necessary for the creditors to sue within the jurisdiction noted in the
agreement .
The Australia corporate act , sets out the general obligations of the company directors in
Australia . If these obligations are breached the consequences are usually very serious , with the
creditors having the right to pursue their levels of any losses they have suffered. The
consequences of breach might include :
 Removal of office : if more than half of the creditors vote in favor , the directors can be
removed from office either on temporary or on permanent basis.
7 Claire Hill, and Richard Painter. "Compromised Fiduciaries: Conflicts of Interest in Government and Business."
Minn. L. Rev. 95 (2010): 1637.

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 Establishment of an interim injunction . This is often conducted in order to prevent any
losses or damages due to the breach of their duties.
 Compensation of the creditors for all the financial losses incurred.in such serious cases
this might result to the entire matter being pursued through the courts . Last, it can also
involve huge fines .
In the event that the organization is to be wound up , the company liquidators might
choose to commence legal actions against the director. Ultimately in this case , the actions might
be for the breach of director obligations , especially if there are serious allegations of personal
liability .In deed . the company debts will remain with the company . Nevertheless , there are
circumstances the company debts become the personal liability of the directors 8.
In this case the directors were personally liable as they had breached their duties thus
causing the company to suffer huge losses. Under such circumstances one might have acted
illegally , be in breach of the criminal provisions as stipulated on the corporations Act 2001 and
they might have to compensate the organization even after it had ceased trading and has been
deregistered.9
Conclusion
The Australian law impose numerous duties and responsibilities upon various individuals
who act on behalf of any of the Australian organizations. Mr. Sam Tipping and Mrs. Rosa
Tipping , as the company liquidators have the legal responsibility to study the behavior of their
8 James Hawley, Keith Johnson, and Edward. Waitzer. "Reclaiming fiduciary duty balance." Rotman International
Journal of Pension Management 4, no. 2 (2011): 4.
9 corporations act 2001 cth.

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employees during the period that led up to the insolvency. Since wrongful trading was evident ,
directors were faced by ineligibility , thus preventing them from operating as company directors
for a period of 15 years . Therefore , it was imperative for Mr. Sam Tipping and Mrs. Rosa
Tipping to properly note their obligations as directors of the organization. The repercussions of
breaching their obligations as directors were severe and could result in personal liability for
company’s debts. In order to avoid this , it is necessary to understand your legal obligation and
have the right legal and financial team behind the directors. In any case the provisions of the
corporations Act are contravened , the involved directors in the contravention might also be
considered as liable .An individual is involved in a contravention if they Act to aid in the
diversion of resources or conspire with other parties in order to affect the contravention.

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Reference
Books/Articles
Atherton, Susan , Mark. Blodgett, and Charles . Atherton. "Fiduciary principles: corporate
Responsibilities to Stakeholders." Journal of Religion and Business Ethics 2, no. 2 (2011): 5.
Franke, Frederick. "Resisting the Contractarian Insurgency: The Uniform Trust Code, Fiduciary
Duty, and Good Faith in Contract." ACTEC LJ 36 (2010): 517.
Hawley, James , Keith . Johnson, and Edward. Waitzer. "Reclaiming fiduciary duty
balance." Rotman International Journal of Pension Management 4, no. 2 (2011): 4.
Hill, Claire, and Richard Painter. "Compromised Fiduciaries: Conflicts of Interest in
Government and Business." Minn. L. Rev. 95 (2010): 1637.
Ribstein, Larry E. "Fencing fiduciary duties." BUL Rev. 91 (2011): 899.
Tyler, John. "Negating the legal problem of having Two Masters: A framework for L3C
fiduciary duties and accountability." Vt. L. Rev. 35 (2010): 117.
Waters, Steven A., and Matthew P. Reinhart. "Partnerships." SMUL Rev. 63 (2010): 703.
Laws/Acts
corporations act 2001 cth.
Sarbanes-Oxley Act of 2002