Federation University Corporate Law Assignment: Directors' Duties

This assignment analyzes key aspects of Australian corporate law, particularly focusing on directors' duties and insolvency. Part A examines the fiduciary duty to prevent insolvent trading, the operation of the safe harbor defense (s588GA), and its differences from the business judgment rule (s180(2)). It also explores restrictions on the s588GA defense and the potential impact of changes to Division 3 on voluntary insolvencies. Part B delves into a case study involving Mr. Daly and other directors, assessing potential breaches of directors' duties, including fiduciary duties and duties under the Corporations Act 2001. The assignment investigates whether the company was trading while insolvent, potential defenses available to the directors, and the applicability of the safe harbor defense in this scenario. The analysis incorporates relevant case law and statutory provisions to provide a comprehensive understanding of the legal issues involved.

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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

defence in respect of their fiduciary duty towards the corporation. Safe Harbour is only available
for a certain time for the directors (Federal Court of Australia, 2017).
4. Are there any restrictions on the operation of the s588GA defence? If so,
what are they?
In the operation of the section 588GA, there are evidentiary restrictions on the directors that they
cannot produce books or other information as evidence in relation to the defence of this section.
And if the books or documents are not available at the time of liquidation then they cannot
produce these books after that for proving that directors are falling in the category of defence of
the safe harbour.
Safe harbour defence also restricts the operation in case of criminal liability. If directors seek
guidance from the legal advisors or perform any duty for the better outcome of the company and
they are liable under section 588G for the civil liability only in these cases safe harbour operates.
If directors did any misconduct in that course of action or dishonestly trading the company for
their own interest in that case directors are restricted for the defence of the safe harbour under
section 588 GA of the Corporation Act, 2001.
Directors cannot produce fabricated books in the court for the defence of this section. The
Burden of proof is on the Directors they have to prove that they fulfil all the terms of safe
harbour defence and there is no false evidence is produced before the court (Section 588GB(3)
(c) and 588GB.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?
Voluntary insolvency means if the directors believe that the company is insolvent in that case
they itself proclaim the insolvency of the company. A manager is appointed in the company for

the administration after the proclamation of voluntary insolvency and that manager cannot be a
member of the company (Mighty River International Limited v Mineral Resources Limited).
But if the company and accounts of the company are not saved by the appointed manager then
the company will go into liquidation. In the liquidation company is winding up that manager or
administrator for the payment of debts. In some cases, even the company is solvent the directors
did not proclaim the insolvency and continues trading for the outcome of money or other
purposes. The Cash flow of the company determines the insolvency of the company (Tolmie,
2013).
Changes in Division 3 will increase the number of voluntary insolvencies as according to this
amendment it is the independent duty of the director to stop the insolvency trading. If the
director did not prevents the voluntary insolvency, the director will be liable for a civil and
criminal offence. The liability of directors in case they fail to prevent insolvency trading is wide-
ranging and rigorous and a penalty for the criminal offence is $200,000 and 5yr punishment in
prisons.
If the director wants any defence under section 588GA, director will seek the legal advice from
the appropriate authority once it comes in the knowledge of the director that the company is in
financial loss. So that voluntary insolvency will increase because of the amendment in division 3
of the Corporation Act.
Section 588GA of the Corporation Act 2001; provide defences to the directors from the section
588G of the Corporation Act, 2001, but it only applies in the cases where directors took the
action steps for the prevention of the Company like contact with the authorized or any
appropriate person. This defence of the director is only limited to the civil liability, if directors
knowingly or with dishonest intention did not prevent the insolvency trading, in that case, they
were held liable for criminal liability and the Safe Harbour defence did not protect such cases.

Part B
1. Did Mr Daly breach any directors’ duties? If so, which ones and how?
Common law, Equity and the Corporation Act 2001 (Cth) stated significant duties of the
Directors. Directors are bound for the disclosure; it is a fiduciary duty of the directors.
Mr Daly breached his fiduciary duty. The Fiduciary duty is not just a duty stated by the law this
duty of the directors redirects the trust and confidence between directors- clients and directors-
company. This duty cannot be compromised in any situation and Mr Daly compromised with this
duty by putting his personal interest before the interest of his clients. He uses the funds of the
company for the marriage of his daughter. It was the duty of Mr Peter Daly that he should reveal
his personal interest in the corporation affairs (As per section 191 of Corporation ACT 2001) and
took the prior sanction from the clients or other investors under section 208 of Corporation Act
and also he did not disclose directors personal interest to the market which is also a breach under
section 205 G of Corporation Act.
The Company was not solvent at that time, and was not able to pay taxes but Mr Daly and the
other direction did not proclaim the insolvency of the company and they were doing insolvent
trading. Section 588G of the Corporation Act stated that it is the duty of the directors to stop the
insolvent trading, Mr Daly breaches his duty given under section 588G of the Corporation Act.
Now investors and client compensated by the directors for the loss occurred due to insolvent
trading (Treloar Constructions Pty Limited v McMillan).
2. Did any of the other directors breach their duties? If so, who, which
duty and how?
Mr Paul was the other Director of the company. He had the same liability of Mr Peter Daly as
both are the director of the company. Paul is also bound by the fiduciary duty and all duties
stated by the Corporation Act. Paul breaches his fiduciary duty as he used the funds of the
company for the divorce settlement; He put his interest before the interest of the investors and

clients. . It was the duty of Mr Paul that he should reveal his personal interest in the corporate
affairs as per section 191 of Corporation ACT 2001 and took the prior sanction from the clients
or other investors under section 208 of Corporation Act and also he did not disclose it to the
corporate market which is also a breach under section 205 G of Corporation Act.
Even though the breach of interest was not dishonest but the profit attained by the breach of
fiduciary duty is the liability of the directors…Sealy & Worthington, 2013.
The records of the account were not maintained by both of the Directors. Unregistered Funds of
the company was expanding into the personal expenses of both Mr Daly and Mr Paul. He was
concerned about the insolvency of the company but he did not disclose it to the investors and the
media...Mitchell, 2019.
3. Do you think the company was trading while insolvent?
If the company is trading and incapable to recompense the debts owed by the company this
means company trading at the time of insolvency. For the better understanding of insolvency
trading means when the all works or process are still going on the company, when directors or
company are not able to pay employee privileges which consist of salaries, retirement funds,
Damages. Cash movement of the company describes that company is able to pay debts or not.
Directors need to be vigilant about the cash flow and financial position of the company as it is
the fiduciary duty of the directors that the prevent insolvency trading, if they breach this duty
they will be personally liable for civil liability and if it is proved that directors are trading the
company for the dishonest intention then they will be liable for criminal liability.
In the case of Mr Daly, E-mails and other evidence clearly show that they know about the cash
flow and the financial condition were not good and they seek advice from the appropriate
authority that means they know that their company was not able to recompense the credits and

the company was trading at that time also they did not proclaim the insolvency of the company
so we think that the company was trading while insolvent… (Plessis, Hargrove & Harris, 2018).
4. If the company was trading while insolvent – are there any defences
available to Mr Daly and/or other directors? If so, what are they?
The Company of Mr Daly or other directors was trading at the time of the insolvency but there
are “Safe Harbour “defence available to the directors. Safe Harbour defence is a defence which
was revised on 19 September 2017 by The Treasury Laws Amendment 2017 in the Corporation
Act 2001 to stop the directors from the personal liability as it is the responsibility of the directors
to prevent insolvent trading but only available to the directors if they are suspicious about the
insolvency of the company and take early action regarding the prevention of outcome of the
business or seek advice from the authorized person and keeping suitable records.
The Burden of proving that directors took the suitable action for the prevention of the company
and outcome of the company stays with the directors, if they were not able to prove that their
case falls under the defence of Safe Harbour in that case there is no defence on the side of
directors. Mr Daly and Mr Paul did not maintain the records of the accounts but the took early
action for the prevention of the outcome of the company and discussed the financial condition of
the company with appropriate authority in that case they can seek for the defence of Safe
Harbour under section 588 GA of the Corporation Act, 2001. After seeking the defence of Safe
Harbour if Directors will not fulfill all obligations regarding the compensation to creditors or
with other tax laws in that case they will be held accountable for the breach of the responsibility
of Directors.

5. Would the new ‘safe harbour’ defence assist the directors? If yes, how? If
no, why not?
Safe Harbour Defence under Section 588 GA of the Corporation Act, 2001 is not limited to the
director’s right to stop insolvent trading. It is also base on the loyalty of the directors towards the
creditors, clients or other investors. For the defence of this section, it is the duty of the directors
that they prove that the conduct of the directors was for the good faith of the company…Smith
& Gold, 2018.
Safe Harbour defence did not assist the directors if they violate the section 588G (2) of the
Corporation Act, 2001. If directors not clear the debts of the investors, did not comply with the
tax laws and did not pay the employee entitlements which consist of salaries, retirement funds,
Damages in that cases the directors cannot ask the defence of Safe Harbour.
Safe Harbour protects the Directors only in the case of civil liability, if Directors are liable for
criminal liability as they dishonestly trading the company at the time of insolvency, in that case,
Safe Harbour defence will not apply to the directors.

References:
Bottomley, S., Hall, K., Spender. P. & Nosworthy, B., (2017). Contemporary Australian
Corporate Law. Cambridge University Press. 2017. ISBN 1316628272, 9781316628270

Mighty River International Limited v Mineral Resources Limited, 2018 HCA 38
Mitchell, J., (2019 January, 8) Beacon under investigation for over a year. Independent Financial
Advisor. Retrieved From: https://www.ifa.com.au/news/26349-beacon-under-
investigation-for-over-a-year
Plessis, J., Hargovan, A. & Harris, J. (2018). Principles of Contemporary Corporate
Governance. (4th Ed.). Cambridge University Press, 2018. PP-207-209. ISBN 978-1-108-
41302-2
Pitman, B., MBA LAWYERS. Director’s duty to prevent insolvent trading (2019). Retrieved
From: http://mba-lawyers.com.au/articles/directors-duty-prevent-insolvent-trading/
Recent Developments in Australian Corporate Governance, Federal court of Australia, 2017.
Retrieved From: http://www.fedcourt.gov.au/digital-law-library/judges-speeches/justice-
collier/collier-j-20170601
Rodgers Reidy, 2016 August, 11. 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
Sampford, C., Coghill, K. & Smith, T. (2016). Fiduciary Duty and the Atmospheric Trust.
Routledge, 2016. PP-188-201. ISBN 9781315582290
Sealy, L. & Worthington, S. (2013). Cases and Materials in Company Law (10th Ed.). OUP
Oxford, 2013. PP-342-344. ISBN 978-019-967644-6
Smith, D. & Gold, A. (Ed.). (2018). Research Handbook on Fiduciary Law. Edward Elgar
Publishing, 2018. P- 319. ISBN 978 1 78471 483 3
The Corporations Act, 2001 (Cth). Section 588GA (3). Retrieved From;
https://www.legislation.gov.au/Details/C2018C00031