Corporate Law: Insolvent Trading and Director's Duties Analysis

This report analyzes various aspects of Australian corporate law, specifically focusing on insolvent trading and the duties of company directors. It examines the legal framework, including Section 588G of the Corporations Act 2001, which addresses directors' responsibilities regarding insolvent trading, and the 'safe harbour' defense introduced in 2017 to encourage directors to take steps to restructure companies facing financial difficulties. The report explores the conditions under which directors can be held liable for insolvent trading, the requirements for the safe harbour defense, and restrictions on its application. It further analyzes a case study involving breaches of director's duties, including insolvent trading and misuse of company funds, assessing the liabilities of the involved directors and the company's insolvency. The report concludes by evaluating the impact of the safe harbour provisions on corporate governance and the potential consequences for directors failing to meet their obligations.

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Contents
Part A...............................................................................................................................................2
Question 1....................................................................................................................................2
Question 2....................................................................................................................................2
Question 3....................................................................................................................................3
Question 4....................................................................................................................................3
Question 5....................................................................................................................................4
Part B...............................................................................................................................................5
Question 1....................................................................................................................................5
Question 2....................................................................................................................................5
Question 3....................................................................................................................................6
Question 4....................................................................................................................................6
Question 5....................................................................................................................................7
References........................................................................................................................................7

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Part A
Question 1
Yes it should be noted that it is the fiduciary duty to stop performing the trade activities when the
business is facing solvency. The management of the company have a fiduciary relationship in the
business environment with the shareholders that they will work in their favour and will not
mislead them. Corporation Act 2001 explains the duties of the director in a business, further
Section 588G of the Corporation Act 2001 (hereinafter referred to as an act) states that it is the
duty of the director to disallow the business from performing certain actions when the company
faces indebtedness. The duty of the directors breaks when their actions make the business
gaining more debts in the environment. Further, it should be noted that according to the act, it is
the liability of the directors of the company to prevent trading activities when the business is
facing insolvency (Rodger Reidy, 2016). There are three specific requirements that are needed to
be fulfilled by the directors. First requirement is that the person responsible must hold the
position of director in the company (Pitman, 2019). Secondly, during the time of generating the
debts, the business must be insolvent or going into insolvency because of the respective debts.
Lastly, all the directors must be aware of the poor condition and insolvent status of the company.
If all these three conditions are fulfilled and still the trading activities are performed then the
directors must be held liable for the insolvent trading in the business under the Section 588G.
Question 2
In a normal situation, the directors of the company are held liable when they do not prevent
insolvent trading activities in the business but the safe harbour act defence in respect of the
directors in such circumstances. The act came into existence in the year September 2017 and the
main notion of the act is to create a defence for the directors so as to promote a positive culture
in the business environment. According to safe harbour, the director cannot be held liable for
insolvent trading when they are performing certain actions to create a positive outcome of the
company using a risky approach. This states that in case of insolvent trading in an organization,
the directors perform certain actions to change the current position of the company (Black,
Schaillee, and Cibich, 2018). Thus, such actions of the directors will fall under the category of
Safe Harbour and it will safeguard the directors from any legal action. This defence is mentioned

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under the section 588GA of the act. However, it is important to check whether the action cause
goodness for thee business or not. The sub section 2 of the section 588GA explains that
treatment of action for the directors in business environment:
 Communicate about the financial position of the company
 Actions are taken to stop the misconduct by management that can affect the debt
repayment ability of business.
 Reasonable actions are taken to make sure the records of the business are effectively
maintained (Hwlebsworth, 2017).
 Development of restructuring plan to ensure positive changes in the financial position of
the company is initiated.
 Get assistance from qualified entities.
So, it should be noted that if a director performs certain actions in an insolvent business
environment considering all the above mentioned aspects then their actions would be treated as a
positive aspect for the business (Marsh, & Roberts, 2017).
Question 3
The section 588GA of the act states that the ‘Safe Harbour’ from the insolvent trading protects
the interest of the directors who become bankrupt in the organization while looking for the good
actions for indebted business. It should be noted that the safe harbour defence is available when
the directors have complete faith on their actions that it will change the insolvent condition of the
company. Thus, in this way, the defence fits with the duties of the director that are mentioned in
the section 180 (2) of the act. Thus, it should be noted that the defence stated under the section
588GA is likely with the rule discussed in the section 180(2) as actions taken by the business to
protect it from loss is also a business judgement only but this case applies only to insolvent
trading (Huggins, Simnett, & Hargovan, 2015).
Question 4
Yes, it should be noted that there are certain restrictions present in defence under section 588
GA. It should be noted that initially, at the time of incurring a debt, if the company was facing
failure to pay compensation to the employees or show documents according to the taxation law,
or any failure has been made from the company 12 months prior to when the debt has been

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incurred then there is no defence available according to the law. Furthermore, if the director fails
to meet the requirement stated under the subsection 475(1), 497(4) or 530A (1) or para 429(2)(b)
after the debt has been incurred then also the director will note be able to perform under the
defence of section 588GA. However, in such case if the court believes that such failure was an
outcome of some exceptional circumstances then then they can defend the directors according to
the safe harbour (Hill, & Conaglen, 2017).
Question 5
The Parliament of Australia originated the Treasury Laws Amendments (2017 Enterprise
Incentives No. 2) Bill 2017 to develop a culture that helps the organizations to innovate and
make effective use of entrepreneurship skills in the environment. The division 3 of the Part 5.7 B
states that the provision related to the duties of the director in accordance with the prevention of
insolvent trading in the business environment. Changes have been implemented in this respect to
introduce section 588GA that shows defence to the directors when they can continue with the
course of action so as to provide benefit to the company in the business environment. The
defence has a great impact as it helped the directors in working in the business environment
effectively (Dunn, 2017).
This defence provides support to the actions of the directors so as to work effectively in the
favour of the business flexibly. However, this section provides support to the activities of the
directors that are conducted to initiate goodness for the company. Voluntary solvency refers to a
situation where the company announces itself insolvent and shows their inability to pay the debts
of the people present in the environment. Such companies require help from the outside
environment to come out of the situation. The company performs such actions when they fail to
make the payment of their debts. Prior to safe harbour, the directors of the company were unable
perform any action because they were restricted under the section 588G (McGirr, 2017). Even
when they used to get good opportunities to take risk and save the company from getting
insolvent, then also they were restricted by the law. However, with the introduction of safe
harbour, the directors can safeguard the interest of the company by performing certain actions in
the business environment. Lastly, it should be noted that it is important for the directors to
perform genuine acts and activities that make the business turn its position from insolvent to

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solvent in the business environment. Then only the safe harbour will safeguard the activities of
the directors (Marsh, & Roberts, 2017).
Part B
Question 1
Yes Mr Daly breached the duties of a director as under the section 588G of the act, it is the duty
of the director to prevent the activities that initiate insolvent trading in the business environment.
However, the actions of Mr Daly did not reflect the same in the business environment. Mr Daly
being the director of the company was required to take steps for the goodness of the business and
not to draw the resources of the company for personal use. Further, it should also be noted that
section 180 of the actions taken by the directors are believed to be in the best interest of the
company which was breached by Mr Daly in the given case. The section 181 explains that it is
important for the directors to act in good faith of the company for its growth (Austlii, 2019).
Further section 182 of the act states that the director should not use his position to gain personal
benefits from the organization and section 183 stats that the director should not make use of the
information given to him to attain secret profits. Thus, it should be noted that above mentioned
are all the sections that were breached by Mr Daly in the business environment (Austlii, 2019).
Question 2
Yes, the other two directors also breached the duties in the given case. As one director had taken
loan from the company in order to maintain his liquid state because the property dispute with ex-
wife and sickness of his old mother took a lot of money from his end. Further, another director
approved the request letters of the directors to withdraw cash for personal use due to which he
has also breached his respective duty. According to sect. 182, a director should not make wrong
use of his position attain personal gain or help any other related person to attain gain from the
business. So, approving to the loans of the other directors made him breach his responsibilities of
being a director. Both the directors allowed Mr Daly to take money for his daughter’s wedding
which is a wrong action according to the law. The company was having two funds under which
one was unregistered while the other one was registered. The unregistered fund had transactions
of huge amount which were unknown. Also, Mr Daly asked the other directors to give him some
amount from that fund in the form of a loan. One of the director disclosed that Mr Daly had

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taken money for the purpose of meeting up the expenses of his daughter’s wedding and another
director took money for the treatment of his mother and settle the claims with his ex-wife
(James, Ramsay, & Siva, 2019).
Question 3
Yes, it should be noted that the company was insolvent and yet trading activities was happening.
There are various explanations given in the podcast that the company was performing insolvent
trading.
 Initially it should be noted that the company was insolvent because the alleged company
Beacon was unable to pay back to the investors when they asked.
 Secondly, some of the investors denied withdrawing the money when they were applied
to withdraw it.
 The directors of the business were not having enough cash to meet their personal needs
due to which they took investor’s money for personal use (Lexology, 2019).
 The investor’s income was used by the management of the company for personal use
with any explanation to the directors.
 A loan of sum $ 70000 was given to Mr Daly in respect of the personal loan application.
When the ASIC interrogated for this purpose then he said that this activity was initiated
to cover the cash flow problems of the business.
 The business was not having enough money to pay compensation to the employees as Mr
Daly took loan for himself but did not pay salary to the employees through that source.
 The second fund of the company apart from the public (registered) funds was having a
huge amount with unregistered transactions as well (RS Lawyers, 2018).
Question 4
No, it should be noted that there are no defences available for Mr Daly and other directors
because they have breached all the duties of the director mention under section 588G. In defence
of this section, if the directors have performed action while they did not know about the
insolvent condition of the company, or the company was not going into insolvency because of
generation of debts. However, the directors of the company breached all the conditions due to
which they have not defence available with them. As they already knew about the poor position

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of the company, they were not paying compensation to the employees but withdrawing money
for personal use. This should be noted that there are no defence available.
Question 5
The safe harbour will not assist the directors or safeguard their interest under the give case
because the directors did not fulfil the conditions of safe harbour. According to the case, the
directors were required to pay compensation to the employees of the company; they were also
required to agree on the duties of commitment. Thirdly, the indebtedness should be brought
directly or indirectly in the business but not through the actions of the directors. However, the
directors of the company did not perform any of such action thus the safe harbour cannot shield
them in the given case (ABC.net, 2019).

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References
ABC.net., (2019). The talented Mr Daly: The story of a businessman, 150 investors, and a $20
million opportunity. (2918, August 26). Retrieved from
https://www.abc.net.au/radionational/programs/backgroundbriefing/the-talented-mr-
daly/10158316
Austlii, (2019). Corporation Act 2001- Sect 183. Retrieved from
<http://www5.austlii.edu.au/au/legis/cth/consol_act/ca2001172/s183.html>
Austlii, (2019). Corporation Act 2001- Sect 588GA. Retrieved from <
http://www5.austlii.edu.au/au/legis/cth/consol_act/ca2001172/s588ga.html>
Austlii., (2019). Corporations Act- 2001 Sect 182. Retrieved from:
http://classic.austlii.edu.au/au/legis/cth/consol_act/ca2001172/s182.html
Black, J. Schaillee, N. and Cibich, K. (2018). Australian law reform: the new ‘safe harbour’ for
directors and stay on enforcement of ‘ipso facto’ clauses. Retrieved from <
https://www.nortonrosefulbright.com/en/knowledge/publications/f8b92454/australian-
law-reform-the-new-safe-harbour-for-directors-and-stay-on-enforcement-of-ipso-facto-
clauses >
Corporations Act, 2001 (Cth)
Dunn, J. (2017). Safe harbour. Company Director, 33(6), 28.
Hill, J. G., & Conaglen, M. (2017). Directors’ Duties and Legal Safe Harbours: A Comparative
Analysis. Research Handbook on Fiduciary Law, DG Smith, AS Gold, eds, Edward
Elgar, UK.
Huggins, A., Simnett, R., & Hargovan, A. (2015). Integrated reporting and directors’ concerns
about personal liability exposure: Law reform options. Company and Securities Law
Journal, 33, 176-195.

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Hwlebsworth, (2017). Safe harbour for directors. Retrieved from <
https://hwlebsworth.com.au/safe-harbour-for-directors/ >
James, P., Ramsay, I., & Siva, P. (2019). Insolvent Trading – An Empirical Study. The
University of Melbourne.
Lexology, (2019). Providing Safe Harbour Advice - Issues for Insolvency Practitioners to
Consider. Retrieved from < https://www.lexology.com/library/detail.aspx?g=626d38ff-
e430-45ec-8817-bb256413e34a >
Marsh, S., & Roberts, S. (2017). Personal liability for insolvent trading: Company directors find
berth in safe harbour. Governance Directions, 69(10), 611.
Marsh, S., & Roberts, S. (2017). Personal liability for insolvent trading: Company directors find
berth in safe harbour. Governance Directions, 69(10), 611.
McGirr, M. (2017). Advocacy: Is safe harbour a safe bet?. Company Director, 33(10), 20.
Pitman, B. (2019). Director’s duty to prevent insolvent trading. Retrieved from < http://mba-
lawyers.com.au/articles/directors-duty-prevent-insolvent-trading/>
Rodger Reidy., (2016). The Role of a Director: Duty to Prevent Insolvent Trading. Retrieved
from < https://www.rodgersreidy.com.au/articles/articles/the-role-of-a-director-duty-to-
prevent-insolvent-trading>
RS Lawyers, (2018). Summary of Safe Harbour Insolvency Law Reforms. Retrieved from <
https://www.rslaw.com.au/summary-safe-harbour-insolvency-law-reforms/ >