Corporate Law: Director's Duties, Safe Harbor and Case Study Analysis

This report delves into the realm of corporate law, specifically focusing on the duties of directors, the safe harbor provisions outlined in the Corporations Act 2001 (Cth), and the implications of insolvent trading. It explores the fiduciary duties of directors, including the duty of care and diligence, acting in good faith, and avoiding misuse of position or information. The report examines the safe harbor defense under section 588 GA, providing a shield against insolvent trading liabilities under certain conditions, and contrasts it with the best judgment rule. Furthermore, it analyzes restrictions on the application of the safe harbor principle and addresses the prohibition of insolvent trading to safeguard the interests of creditors, investors, and shareholders. The report concludes with a case study analysis of a financial scam, evaluating the breaches of duties by the directors involved and their potential liabilities under the Corporations Act 2001 (Cth). The analysis extends to the liabilities of other directors in subsidiary companies, highlighting the misuse of funds and violations of various sections of the Act, emphasizing transparency and compliance issues.

Running head: CORPORATE LAW
CORPORATE LAW
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Table of Contents
Part A...................................................................................................................................2
Question 1:.......................................................................................................................2
Answer 2:.........................................................................................................................3
Answer 3:.........................................................................................................................4
Answer 4:.........................................................................................................................4
Answer 5:.........................................................................................................................5
Part 2:...................................................................................................................................6
Answer 1:.........................................................................................................................6
Answer 2:.........................................................................................................................7
Answer 3:.........................................................................................................................8
Answer 4:.........................................................................................................................8
Answer 5..........................................................................................................................9
References:........................................................................................................................10

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Part A
Question 1:
The Corporations Act 2001 (Cth ) enumerates some of the general duties of the directors
throughout its different sections. These general duties entrusted to a director are regarded as the
fiduciary duties as such duties are based on mutual trust, liabilities and fidelity (Hedges et al.
2016).
This Act mainly refers to four general duties of the directors of any company that is
covered under the provisions of this act (Hill and Conaglen 2017). The general duties of the
directors include the duty of care and diligence, duty to act in good faith, duty not to misuse their
position and any information inappropriately.
Section 180 says that a director has a duty of diligence and care while performing any of
his duties. Section 181 provides that the director must execute his duties in good faith to achieve
the best interest of the company. This duty of the director as given in section 181 is often
regarded as the duty of fidelity and trust. This duty is also recognized under the common law
principle. Section 182 says that the director must not use his position to benefit himself or
anyone else at the cost of the company. Similarly, section 183 provides that misuse any
information that he got by the virtue of his position for incurring personal gain. These duties are
regarded as the fiduciary duties (Hill and Conaglen 2017).
Apart from these, the director also has a duty to prevent insolvent trading of the company
as laid down in section 588G. There lies a confusion regarding section 588 G of the said act as to
whether such duty is a fiduciary duty or not.

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After looking at the provisions enumerated in this section, it is seen that under the section
the directors have an indirect duty to protect the interest of the creditors and investors of the
company. The directors have responsibilities to protect the interest of the investors and the
creditors (Hill and Conaglen 2017). If a company is involved in insolvent trading, then the
interest of the creditors and the investors will be grossly affected. Hence, it is their duty to
prevent it, thereby protecting the interests of the shareholders, creditors and investors. Thus it is
seen that this duty as given in section 588 G is based on mutual relation of trust between the
directors and the outsiders of the company. Hence this duty to protect insolvent trading can be
regarded as the fiduciary duty of the directors (Barker 2018).
Answer 2:
The Corporations Act 2001 (Cth ) provides the safe harbor defence principle under
section 588 GA of the said act. This provision was introduced on September 19th , 2017 by the
amendment of the section. It is introduced to create a defence to the directors from insolvent
trading. This defence is added to empower the directors to take an initiative to prevent the
insolvency of the company.
Section 588 GA (1) states that section 588 G will not be applied to the directors if the
following two criteria are fulfilled. The first criterion is that when the director is able to know
that the concerned company has turned insolvent or is approaching insolvency soon, then he
takes some initiatives or measures so as to result into better working of the company instead of
appointing a liquidator or administrator. The second criterion to be satisfied to avail the safe
harbor shield is that the debt caused to the company is the outcome of the actions taken by the
director after he was aware about the insolvent trading of the company.

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Answer 3:
The Corporations Act 2001 provides a protection in the form of safe harbor principle as
enumerated under section 588 GA of the said act. It is a protection given to the directors against
their personal liabilities during insolvent trading whereas section 180 provides the best judgment
rule for the directors and officers of a company (Low and Low 2018). The directors under best
judgment rule must act carefully and diligently in connection to section 180 (2) such that the
judgment is taken in good faith for the best interest of the company (Harris and Hargovan 2016).
Moreover, the directors or officers must not incur any personal gain while making judgment such
that they have reasons to believe that such judgment is perfect and for the best interest of the
company.
The main points of differences between the above mentioned sections are that section 588
(GA) gives protection to the directors only whereas that section 180 (2) is applied to the officers
plus the directors of the company (Low and Low 2018). Moreover, section 180 (2) provides a
duty to the directors to be followed by them in all conditions as long they are the directors of the
company. But protection under section 588 (GA) to the directors are dependent on certain
criteria on the fulfillment of which such protection is available to them.
Answer 4:
The Corporations Act 2001 ( Cth) provides few restrictions on the application of the safe
harbor principle under Sections 588 GA (4) and 588 GA (5). This safe harbor defence is
unavailable to the directors when the company is not in compliance with its duty to distribute the
payments of its employees. it is also not available when the directors have failed to perform the
duties within 1 year period after the debt was caused. Moreover, if the director is unable to

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perform his duties for the company after the incurring of debt, then also the defence is not
granted to the directors (Hedges et al. 2016).
Answer 5:
The Corporations Act 2001 ( Cth) provides that the directors shall not engage in any
transaction by which debt can be incurred when they know the company is already or can
become at any time insolvent. A company is said to be insolvent when it fails to pay off its debts
to the creditors. One of the primary duties of the directors is to maintain the interest the interests
of the creditors, investors as well as shareholders of such company and safeguard them carefully
(Hedges et al. 2016). Thus insolvent trading is prohibited generally to safeguard their interest.
however, section 588 GA provides protection to the directors against the insolvent trading on
certain conditions.
The safe harbor protection as stated under section 588 GA of the act allowed the directors
to trade during insolvency to keep the control of the company in their own hands. Before the
introduction of this section, the directors do not have any power in their hands after the company
becomes insolvent or has high probability to turn insolvent as then the control of the company
used to go into the hands of the administrators or liquidators as they are immediately appointed
by law in such situations.
After this amendment, the directors were given an opportunity to keep the hold of the
company in their hands and work on to achieve better results for the company instead of letting
the company go into liquidation and administration. Apart from these, the directors are allowed
to take an attempt to change the board room of the company. this defence also allows them to

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interact with the creditors, investors and shareholders of the company and take steps to control
and overcome the insolvency state of the company.
On the other hand, voluntary insolvency is a situation when the debtor like a company or
an individual refused to pay off its debts. The safe harbor defence given in Division 3 also has
given the directors an opportunity to misuse this shield for their own benefits. This defence has
formed loopholes into which the creditors can fall. The directors can arbitrarily misuse this
protection to make fool of the creditors who can make transaction with the company without
knowing that it is already insolvent or can become insolvent anytime. Thus the security of the
creditors and investor will be at high risk as they will not be having idea that there are doing
investments in an insolvent company.
Hence, the changes brought by the introduction of safe principle have the above said
disadvantages on the company as it will increase the number of voluntary insolvencies in the
country.
Part 2:
Answer 1:
As per the facts of the given case of financial scam in Australia, Peter Daly has
committed one of the largest financial scam. From the facts heard in the Podcast, it appears that
Mr Daly has grossly violated his duties as the director of the company (Hill and Conaglen 2017).
Section 180 says that a director has a duty of diligence and care while performing any of
his duties. Section 181 provides that the director must execute his duties in good faith to achieve
the best interest of the company. This duty of the director as given in section 181 is often

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regarded as the duty of fidelity and trust. Thus it is seen that he did not act in good faith and did
not perform his duties carefully and diligently for achieving the best interest of the company.
Thus it is seen that he had breached sections 180 and 181. His act of withdrawing money from
the company has led the company to suffer tremendous financial loss. He used his position to
convince the investors and mislead them that they will be getting huge return by investing in the
company. Thus he breached section 182 of the said act.
He did not give proper information to the investors in the Product Disclosure Statement
of the company. It had only professional terms with the purpose of misleading and confusing the
investors. He even formed Ponzi scheme to defraud the investors. His acts were not transparent
and compliance problem.
He breached section 588 G as his acts showed that he was involved in insolvent trading to
gain personally. He didnot keep and maintain the Annual financial reports, directors’ reports and
the financial records, thus he violated section 344.
Moreover, he used funds of the company for personal benefits like he sponsored his trip
to Greek Island by using company’s money. His credit card bills were also paid from the
company’s funds. Moreover, he failed to lodge with ASIC and thus breached section 188 too.
All these show that he has breached his duties as a director of the company (Hedges et al.
2016).
Answer 2:
Apart from Mr Peter Daly, the other two directors of the two subsidiary companies of the
Linchpin Capital were also liable for breach of duties as the directors of the company (Hill and
Conaglen 2017). Like Mr Daly, the other two were also responsible for infringing various

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sections of the Corporations Act 2001 (Cth ). They had misappropriated the funds of the
company for their personal reasons. One of them used Company’s money to fund his divorce his
divorce case with his wife. Another withdrew money from the company to spend on the
daughter’s marriage. Thus they used the money of the investors for personal reasons.
Answer 3:
From the facts of the case, it was clear that since the year 2017, the financial condition of
the company was going down. The directors were withdrawing money from the investors by
making false promises to them that they will get principal along with attractive interest as
returns. But in reality they were using money deposited by the new investors to repay the older
ones. Emails from March 2017 showed that the company had no money to pay its taxes and
loans. Paul Green, an accountant after going through IIOF records expressed concerns regarding
the solvency of the company. The directors knew that the company was losing money still they
kept on collecting money from investors to sponsor their personal needs. These showed that the
directors were involved in insolvent trading.
Answer 4:
The directors can raise the defences for insolvent trading as per Corporations Act 2001.
They can claim that the company has never undergone or about to become insolvent. They can
argue that the debts were incurred when the company was solvent. They can even defend
themselves that they involved in insolvent trading to result into better result of the company by
restructuring the present framework. Mr Daly even defended his act of taking loan that he was
returning the borrowed money by deducting it from his salary monthly. They can claim that they
allowed collection of money to repay the existing debts of the older investors else the company
may go into liquidation or administration.

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Answer 5
The directors to protect themselves from personal liabilities for insolvent trading under
section 588 G of the Corporations Act 2001, they can refer to the safe harbor defence as given in
section 588 GA of the said act. The directors can avail the protection under this section by
claiming that the moment they can presume that the company was approaching insolvency; they
had taken steps to achieve better results of the company. They can argue that the steps were
employed to prevent the company to go into liquidation or administration. They tried to keep the
control in their hands to prevent the insolvency of the company.
However, after taking into consideration the measures adopted by the directors, it will be
difficult for the directors to avail the protection of section 588 GA of the act.

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References:
Barker, S., 2018. An introduction to directors’ duties in relation to stranded asset risks.
In Stranded Assets and the Environment (pp. 221-271). Routledge.
Harris, J. and Hargovan, A., 2016. Still a sleepy hollow? Directors’ liability and the business
judgment rule. Directors’ Liability and the Business Judgment Rule (March 7, 2016), 31.
Hedges, J., Bird, H., Gilligan, G., Godwin, A. and Ramsay, I., 2016. The policy and practice of
enforcement of directors' duties by statutory agencies in Australia: An empirical analysis. Melb.
UL Rev., 40, p.905.
Hill, J.G. and 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.
Low, C.K. and Low, T.H., 2018. The Business Judgment Rule: A Safe Harbour for Directors?.
The Corporations Act 2001 (Cth )