BULAW5915 Corporate Law Assignment: Director's Responsibilities

This report analyzes the duties and liabilities of company directors under the Australian Corporations Act 2001. It begins by outlining the general fiduciary duties, including due care and diligence, good faith, and the proper use of position and information. The report then explores the concept of insolvent trading and the safe harbor defense provided by the Act. The business judgment rule is examined in relation to director's duties. The report further discusses the restrictions on the safe harbor defense and the consequences of trading while insolvent. A case study is then presented, assessing the breaches of director's duties by Mr. Daly and other directors, specifically focusing on the misuse of company funds. The report concludes with a comprehensive overview of the directors’ responsibilities.

Running head: CORPORATE LAW
CORPORATE LAW
Name of Student
Name of University
Author Note

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Table of Contents
Part A...............................................................................................................................................2
Question 1....................................................................................................................................2
Question 2....................................................................................................................................3
Question 3....................................................................................................................................4
Question 4....................................................................................................................................5
Question 5....................................................................................................................................6
Part B...............................................................................................................................................7
Question 1....................................................................................................................................7
Question 2....................................................................................................................................7
Question 3....................................................................................................................................8
Question 4....................................................................................................................................9
Question 5....................................................................................................................................9
Reference.......................................................................................................................................11

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Part A
Question 1
The general duties of the directors are discussed in various sections of the Corporations
Act 2001. As the basis of the general duties is faith, respect and liability towards each other they
are also known as fiduciary duties (Huebner & Klein, 2015).
Four main fiduciary duties of the directors had been discussed elaborately under the
Corporations Act 2001. These duties are- duty of due care and diligence, duty of good faith, duty
of not using their position in an improper way, and duty to not using company’s information
improperly (Home, 2017). These fiduciary duties have been discussed under the sections 180-
183 of the Corporations Act 2001.
Section 180 mentions the duties of a director for due care and diligence. This section
requires a director to act with a standard care and diligence expected from any reasonable person.
Section 181 of the act requires for a director to act in a good faith for the best interest of the
company. The duty of fidelity and trust is imposed on the directors by section 181 of the
Corporations Act as well as by the common law. Section 182 refrains a director from taking any
undue advantage of his position for his own benefit or the benefits of others in a way that is
detrimental to the company. In the section 183 the director is further refrained from using any
information regarding the business of the company for his own benefits or the benefits of any
other person that can be detrimental to the company.
Apart from these four main duties there are some additional fiduciary duties of the
directors mentioned under various sections of the act. The sections discussing the duties of the
directors are sections 188, 191, 344, 588G and 674.

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Section 188 states the duty of a director to inform ASIC with all necessary information
relating the business of the company. In the section 191 the director’s duty is mentioned to
disclose information related to the affairs of the company in relation with sections 208 and 205G
to the shareholders and other directors. Following section 344 of the act the director is obliged to
take reasonable steps to maintain correct financial reports and recordings according to the
provisions mentioned under the Corporations Act. Duty of a director to refrain from trading
while the company is insolvent or there is a risk of the company to become insolvent is
mentioned under the section 588G of the act. The director is further liable under the section 674
of the act for the disclosure of the information affecting the share of the company to the market.
Towards the stakeholders and investors of the company a director has the duty to prevent
trading during insolvency. This duty has been mentioned in the section 588G of the act (Huebner
& Klein, 2015). Section 588G of the Corporations Act 2001 (Cth) mentions the duty of director
to refrain from performing trade while the company is or expected to be insolvent. For the breach
of this section the directors are imposed a penalty of $200,000 under the Part 5 of the Act (Hill &
Conaglen, 2017).
Question 2
The provision refraining a director from trading during the company’s insolvency is laid
down in the Corporations Act 2001. The provision of safe harbor is introduced under the section
588 GA of the Corporations Act 2001 (Cth). This section provides for the directors a defense
against insolvent trading encouraging them to attempt the restructuring of the company (Dunn,
2017). In the case there is breach of the provision of this act the directors are to be held liable for
the loss incurred by the company (Hedges et al., 2016). Under two conditions the provisions
mentioned in the section 588G (2) is inapplicable to a director towards his duties. These

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conditions are laid in the section 588GA (1) of the Corporations Act. The conditions are- after
being able to suspect the insolvency of the company certain courses of action has been taken by
the director to prevent the insolvency and appointing a liquidator or an administrator as soon as a
debt has been incurred by the company because of the direct or indirect actions of the directors
and for which the director is unable to take any reasonable action. Further the directors need to
establish that there had been proper maintenance of financial records which could prove that the
business was being conducted in a correct manner.
Question 3
By providing the defense of safe harbor against insolvent trading the Corporations Act
gives the directors a protection against their personal liabilities. The business judgment rule
providing the duty of any director to act with due care and diligence can be seen to be applicable
to the section 180 of the Corporations Act (Low & Low, 2018). This rule had been created for
the prevention of the unnecessary limitations on the acts of businesses. The business judgment
rule requires a director to act carefully and diligently while making a judgment in good faith in
the best interest of the business under the section 180 (2). The judgment is needed to be believed
by the director to be rational and reasonably perfect and the judgment can be for the best interest
of the company.
Section 180(2) differs from section 588GA in the fact that the provisions of the former
section are applicable not only towards directors but even towards other officers of the company
whereas the provisions of the section 588 GA are only applicable towards the directors of the
company. Another point of difference between the two is that section 180(2) lays down the
business judgment rule that needs to in compliance with the section 180(1) of the act. Both
sections 180(1) and 180(2) have been seen to exhibiting the duties a director is required to be

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fulfilled. On the other hand section 588 GA is seen to be providing defense for the directors
instead of imposing any duty towards them. Therefore it can be seen that the section 180 (2)
imposes duties under its provision while the section 588GA provides for the defensive provisions
for the directors against allegations brought against them (Marsh & Roberts, 2017).
Question 4
The restrictions relating to the application of safe harbor defense under the section
588GA has been provided under the sections 588GA (4) and 588GA (5) of the Corporations Act.
The restrictions can be mentioned as follows:
o The director has to establish the fact that he suspected about the company’s insolvency
and in furtherance he took reasonable actions for the safeguard of the company
o The director needs to prove the fact that the best judgment decisions taken by him during
the times of need is related with the debt incurred by the company
o It further needs to be established that the employees are not being paid by the company
because of the debts incurred
These restrictions that had been imposed on the section 588GA establish facts that either the
company is insolvent and are failing in providing any statement returns as mentioned in the
Taxation Law or that the company has been failing on carrying out its responsibilities as an
administrator.
Question 5
Following the provisions of the Corporation Act the directors are directed not to get
involved in any dealings that can be incurring debts when they are under the presumption that the
company is either insolvent or is highly likely to be insolvent. An insolvent company can be

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described as a company that is unable to pay debts to the creditors. Insolvency can be of two
types, firstly a company that is already unable to pay off its debts or secondly the company that
will in future be unable to pay off the debts to its creditors. The duty of a director of a company
is to keep the interests of the investors and creditors safe. If the company is found to be trading
even when the directors have the knowledge of its insolvency or the chances of the company
becoming insolvent the directors are held personally liable. However protection against this type
of situation is given to the directors under the section 588GA.
Before the incorporation of the section 588GA when a company turned insolvent the
director did not have any power or authority over the company’s business as the company went
in the hands of a liquidator or an administrator. However with the introduction of the safe harbor
defense mentioned under the section 588GA of the act the directors have control over the
company’s business. This defense has allowed the directors to take innovative measures for the
company’s benefits and further allows the directors to interact with the investors, shareholders
and creditors of the company to take necessary measures to overcome insolvency of the
company.
Voluntary insolvency is defined as the insolvency when the debtor refuses to pay his
debt. The provision under the Division 3 of the Act tight lines the position of the director making
the creditors suffer due to change in Division 3. The safe harbor shield can be seen to be used by
the directors rampantly for their own protection against accusation of trading while insolvency.
This would risk the security of the creditors at risk because the dishonest directors would further
trade in insolvency. These can be stated as some of the ill effects of the changes in Division 3
would be having on voluntary insolvencies.

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Part B
Question 1
In the given case it can be seen that Mr. Daly is in breach of his duties as a director under
the Corporations Act 2001. Section 180 of the act stating the duties of the director to act with
care and diligence is breached in the case. Section 181 that mentions the directors’ duties to act
in good faith for the welfare of the company is breached. Further section 182 refraining the
directors from misusing their powers has been in breach in this case.
By not performing his duty to act with care and diligence for the company’s best interest
Mr. Daly can be seen to be in breach of section 180 of the Act. By not acting in good faith while
misusing the company’s fund for his personal benefit he further violated sections 181 and 182 of
the Corporations Act. At last it can be seen that Mr. Daly further violated section 184 by not
disclosing the company’s financial information to the investors and shareholders.
Question 2
The other two directors of the company along with Mr. Daly can be seen liable for the
breach of directors’ duties. The two directors misused the company’s funds for their personal
benefits instead of the best interest of the company. It was found that one of the directors used
the company’s funds to dissolve his marriage while the other director was found to be using the
company’s funds for the marriage of his daughter. It can be stated that in both the cases the
company’s funds were used for purposes other than what it was actually intended for that is for
the benefit of the company and to return to the investors. It can be seen as a gross
misappropriation of funds by directors.

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The directors can be found to be breaching the sections 180-182 of the act by not acting
in good faith, not using due care and diligence, and for inappropriate misuse of their positions for
their personal benefits. In furtherance, they also breached section 191 and 344 of the act by not
disclosing the company’s information to the investors and shareholders and by not maintaining
the financial records of the company. Moreover they can be seen to be not maintaining proper
Annual financial reports and director’s reports.
Question 3
It can be seen that the company was involved in trading while in insolvency. Although
the deteriorating condition of the company can be traced since 2017 yet the company could be
seen to be accepting investments from the investors under the false pretence of good financial
condition of the company. The company further promised the return of the investments of the
investors with interests on the profit. The misconduct was carried out by the directors despite the
knowledge that these conducts were breach of both fiduciary and statutory duties. The directors
further took out companies funds and misused them for their personal uses. When the investors
do not receive the investments made by them back from the company, the company can then be
said to be in the brink of becoming insolvent. In the current case the company can be said to be
trading in insolvency because although the directors accepted the money from the investors yet
their shares were not returned by the company.
Question 4
If the directors can prove that during the time of incurring the debts the company was
solvent and there was no risk of the company to be insolvent the directors could defend
themselves under the provisions of the Act against the accusations of insolvent trading (Deva,

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2013). The directors further need to establish that if they knew about the insolvency they would
have taken necessary steps for the prevention of the insolvency.
If it can be proved by a director that he was not being able to be the part of the
governance of the company for some personal or health related reasons the director would be
able to defend himself. It also has to be proven that if the director was present definite steps for
the safeguard of the company would have been taken by him.
Question 5
Under the Section 588GA of the Corporations Act 2001 (Cth) the defense of safe harbor
can be found to be available for the directors. The defense of the directors would be protected by
this provision. Under this provision the directors can safeguard themselves from the liability of
accusations of trading during insolvency.
By mentioning the fact that reasonable care have been taken by the directors since their
knowledge of the company is insolvent and by showing that the directors have taken certain
measures and course of action to reduce the adverse effects of the insolvency that the directors
can claim for the defense of the safe harbor. It can be further claimed by the directors for
overcoming the adverse effects of insolvency there has been formation of structuring plans made
by them.
In reality, however, after the steps and measures taken by the directors are being
considered, it would be difficult for them to take advantage of the safeguard protection for
insolvent trade, as they were not concerned about the company's future but their personal
benefits. They will not be able to defend themselves as they did not participate in activities that

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were actually carried out for the benefit of the company as provided for in the provisions of the
Corporations Act 2001 (Cth).

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Reference
Brown, A. (2016). ASIC: Better communication, insolvent trading and notices to
creditors. Australian Restructuring Insolvency & Turnaround Association Journal, 28(1),
42.
Deva, S. (2013). Sustainable Business and Australian Corporate Law: An
Exploration. University of Oslo Faculty of Law Research Paper, (2013-11).
Dunn, J. (2017). Safe harbour. Company Director, 33(6), 28.
Fox, J. (2015). Honest and reasonable director defence. Governance Directions, 67(4), 218.
Harris, J. (2016). Reforming insolvent trading to encourage restructuring: safe harbour or sleepy
hollows?. Journal of Banking and Finance: Law and Practice.
Hedges, J., Bird, H., Gilligan, G., Godwin, A., & Ramsay, I. (2016). The policy and practice of
enforcement of directors' duties by statutory agencies in Australia: An empirical
analysis. Melb. UL Rev., 40, 905.
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.
Horne, A. (2017). Call for review of Corporations Act. Governance Directions, 69(8), 450.
Huebner, M. S., & Klein, D. S. (2015). The Fiduciary Duties of Directors of Troubled
Companies. AM. BANKR. INST. J., 34, 18-18.

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Low, C. K., & Low, T. H. (2018). The Business Judgment Rule: A Safe Harbour for Directors?.
Marsh, S., & Roberts, S. (2017). Personal liability for insolvent trading: Company directors find
berth in safe harbour. Governance Directions, 69(10), 611.
The Corporations Act 2001 (Cth)