BULAW5915 Corporate Law: Director's Duties and Insolvency

This report examines key aspects of Australian corporate law, primarily focusing on the duties of company directors and the implications of corporate insolvency. The report begins by outlining the fiduciary and general duties of directors, referencing specific sections of the Corporations Act 2001, including those related to due care and diligence, good faith, and the avoidance of conflicts of interest. It explores the concept of insolvent trading, the liabilities directors face in such situations, and the 'safe harbor' provisions designed to protect directors who take proactive measures to prevent insolvency. The report further differentiates between the duties imposed on directors and the safe harbor defense, and discusses the restrictions on the applicability of section 588GA of the Corporations Act. The report also considers the definition of insolvency and the factors that can contribute to it. Part B of the report presents a case study, analyzing the breaches of director's duties, including misusing company funds, failing to disclose financial information, and engaging in insolvent trading. The analysis includes the potential liabilities of the directors and available defenses. The assignment demonstrates a comprehensive understanding of corporate law principles and their application in real-world scenarios.

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

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Table of Contents
Part A...............................................................................................................................................2
Answer 1......................................................................................................................................2
Answer 2......................................................................................................................................3
Answer 3......................................................................................................................................3
Answer 4......................................................................................................................................4
Answer 5......................................................................................................................................5
Part B...............................................................................................................................................6
Answer 1......................................................................................................................................6
Answer 2......................................................................................................................................6
Answer 3......................................................................................................................................7
Answer 4......................................................................................................................................8
Answer 5......................................................................................................................................9
Reference.......................................................................................................................................10

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A
1
The conducts of a director to be acting in due care and diligence, good faith, not abusing
power, avoiding interest conflicts, acting for company’s best interest and maintain confidentiality
of company’s information can be described as ‘fiduciary’ or general duties of the directors. It
can be seen in sections 180, 181, 182 and 183 the ‘fiduciary’ duties of the directors have been
mentioned. The directors are further refrained to trade during insolvency under the section 588G
of the Corporations Act 2001 (Cth).
Section 180 of the act discusses duties of a director in relation with due care and
diligence as can be expected from a reasonable person. Section 181 requires a director to be
acting in ‘good faith’ for the company’s best interest. Section 182 of the Act creates restrictions
for a director from misusing his position in company for any personal gain. Section 183 of the
Coporations Act restricts a director to misuse company’s confidential information for any
personal gain.
The fiduciary or general duties are imposed on directors through the mutual trust that can
be seen to be existing among the contracting parties, binds them in a relationship. The directors
are obligated to foresee probable harm by the way of execution of their statutory duties while
adhering to reasonable care of a certain standard. A director is refrained from insolvent trading
under provisions of the section 588G of the Corporations Act, breach of which would amount to
a penalty of almost $200,000 as has been mentioned in the Part 5 of the Corporations Act (Hill &
Conaglen, 2017). The director can be found to be liable for the breach of statutory duty resulting

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in an injury or loss to the company and pay compensation. However a director might not need to
pay any compensation for the breach of a fiduciary duty.
2
The Corporations Act lays down the provisions for restraining directors from trading
when the company is in debt or insolvent (Marsh & Roberts, 2017). When the company
accumulates debts or becomes insolvent by such debt the directors can be held liable for the loss
that has been incurred (Hedges et al., 2016). To demand compensation it has to be proved that
the director had sufficient reasons to be foreseeing the probabilities of the company’s insolvency
and refrain from trading.
However section 588GA of the Corporations Act 2001 provides the defense against a
director’s breach of duties. This section can be seen to be providing a ‘safe harbor’ to the
directors when they have been blamed for certain conduct (Hill & Conaglen, 2017). The
liabilities of the directors that arise because of the accusations of trade during insolvency under
the section 588G (2) are safeguarded by the section 588GA (1) of the Corporations Act 2001
(Cth). However this section only provides the directors with defense only if it is proved that for
prevention of the insolvent trading of the company they had taken proactive measures. The
directors need to prove that they had suspicions about the insolvency of the company and in
regard to that suspicion had taken certain steps to stop the company from transacting further that
would help in boosting the insolvency. The directors further need to establish that they had
maintained proper financial records that could prove the correct conduct of the company.

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3
The company’s directors are protected by the ‘defense of safe harbor’ provided in the
section 588GA of the Corporations Act (Dunn, 2017). When a company is involved in insolvent
trading or the directors in their position in the company are accused of breach of any statutory
conduct they are protected under the provisions mentioned in this section. Section 180 of the
Corporations Act provides ‘the business judgment rule’ mentioning the duty of a director
resulting to care and diligence (Low & Low, 2018). This section requires a director to make
judgments in the company’s best interest under the section 180 (2) with due care and diligence.
The director needs to be believing that the judgment that has been taken by him regarding the
company’s best interest was rational.
Sections 180 (2) and 588 GA of the Corporations Act 2001 can be set apart on how the
two sections approach the stakeholders. Section 180 (2) provides the principle of ‘business
judgment rule’ in compliance with the section 180 (1) of the Act as both show the duties that a
director is needed to fulfill. Section 180 (1) of the Act asks a director to be acting with due ‘care
and diligence’ to the company. Section 180 (2) advises a director for using his position in the
company wisely. A director should necessarily abide by the duty of due diligence and care when
making business judgments. In section 588GA of the Corporations Act no duty is imposed upon
a director instead a defense of safe harbor is seen to be provided to directors. Thus it can be seen
that the former section imposes duties on a director whereas the later section provides for a
defense against allegations of misconduct.

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4
There are a few restrictions that can be imposed to the applicability of the section 588GA
of the Corporations Act. Sections 588GA (4) and 588GA (5) of the Corporations Act provides
for the restrictions. The restrictions are as following:
 The director needs to establish that when the insolvency of the company was suspected
by him he took necessary measures to prevent the insolvency
 The director needs to prove that the best judgment decisions taken by him is related to the
debts that has been incurred by the company.
 The fact that the company cannot pay its employees their dues because of its debts also
needs to be established.
The restriction on the section 588GA of the Corporations Act have been imposed to establish
that company has been suffering from ‘insolvency’ by failing to provide any statements of
returns that has been required under the taxation law or by being in failure in carrying out their
responsibilities as administrators.
5
A company can be considered to be insolvent when its fails to repay the debts it has
incurred. In the case Sutherland v Hanson Construction Pty Ltd (2009) it was stated by the New
South Wales Supreme Court that solvency of a company can be determined by the cash flow of
the company. The Corporations Act provides the duty of a director to prevent trading when he
can presume a risk of insolvency that could be faced by the company. The provision of the rule
of defense of safe harbor against the insolvent trading of the company, however, is mentioned in
the section 588GA. The safe harbor rule was introduced for encouraging directors for the good

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governance of the company in a critical situation without needing a legal practitioner for the
settlement of insolvency.
When the debtor refuses to pay the debt incurred by the company it can be defined as
voluntary insolvency. The changes that had been made in the Division 3 will make the creditor
suffer more by tight lining the directors’ position. These further results in insolvent trading by
dishonest directors and in putting the securities of creditors and investors who are unaware of the
financial situations of the company at risk.
The factors mentioned in the above paragraphs can be described as the probable ill effects
that would be the results of the change in Division 3 that could affect the creditors for voluntary
insolvency.
B
1
In this current case Peter Daly is liable for the breach of ‘director’s duties’ mentioned
under the Corporations Act 2001 (Cth). The duty of directors to act in ‘care and diligence’
mentioned under the section 180of the Act is been breached by him. Section 181 of the Act
stating the duty of director to act in ‘good faith’ has been breached by Peter Daly. Further he is in
breach of section 182 of the act that refrains directors from misusing their position in the
company for the company’s best interest.
Mr. Daly can be seen to be breaching the section 180 of the Corporations Act by not
acting for the company’s best interest with due care and diligence. Mr. Daly can be further seen
to be in violation of the sections 181 and 182 of the Act by not acting in good faith as he is found

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to misuse the company’s funds for his own personal benefits. He can be also being held violating
the section 184 by keeping the company’s information from the shareholders and also by not
informing the investors about the company’s financial conditions.
2
The two directors of the company are also held liable for breach of duties as a director of
the company like Peter Daly. Both the directors used company’s funds for their own purpose
instead of using it for the benefits of the company. It is seen in the case that one director used the
company’s funds for the marriage of his daughter and the other director used company’s funds to
dissolve his marriage. In both the cases company’s fund was not used for their designated
purpose which is for the company’s benefit and to return to investors instead the company’s
funds were used by the directors for their own personal benefit. This is a ‘gross
misappropriation’ of funds.
The two directors can be seen to be breaching the sections 180, 181and 182 by not
conducting with good faith, not acting with ‘care and diligence’ and by using inappropriately
their position for their own benefits respectively. The directors can further be found to be
breaching the sections 191 and 344 of the Corporations Act because the financial information of
the company were not being disclosed by the directors to the investors or shareholders and
because of not maintaining correct financial and directors’ report.
3
The company can be seen to be indulging in ‘insolvent trading’. Although the condition
of the company can be traced to deteriorate since 2017 still the company had been accepting
investments from the investors under false promise of good financial performance and condition.

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The company even falsely assured its investors that they would be receiving the returns of their
investments with interests on the profit that was agreed. The misconducts and misappropriations
were carried out by the directors even when they had the knowledge that these conducts were
breach of both statutory and fiduciary duties. Even after knowing about the deteriorating
financial conditions of the company the directors still took money from the company’s funds for
personal benefits. When a company cannot return the investments of the investors back they can
be said to be in ‘brink of insolvency’. In this case similar situation can be observed as the
directors were seen to be accepting money on the company’s behalf from the investors yet the
shares of investments were not returned by the company. This indicates the company had been
indulging in ‘insolvent trading’. In the case Perrine v Carrello (2017) states that even the flexible
arrangements between entities in relation can be considered as debts and if incurred during
insolvency this debt can be constituting insolvent trading and would render directors to be
personally liable for the ‘incurred debt’.
4
In regard to the accusations against trading during insolvency there are various defenses
available to the directors. If it can be proved by the directors that there was no assumption for the
risk of company being insolvent when the debt was ‘incurred’ by the company and the company
was solvent at the time of the incurring of debt and there was no reasonable cause for the
company to be insolvent the directors could defend themselves by the provision of this section
against the accusations of insolvent trading (Deva, 2013). The directors further need to establish
the fact that if they had known about the insolvency of the company or there had been any
assumption of future insolvency of the company they would have taken necessary measures or
actions for preventing the company from the ‘insolvency’. The director can further defend

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himself by way of citing information of the solvency of company that has been provided by any
competent person. In Inner West Demolition Pty Ltd v Silk (2018) it was held by the court that
for making a claim for ‘insolvent trading’ the consent of a liquidator is needed to be obtained.
Further if it can be proven by the director that he had been unable to participate in the
process of governance of the company because of personal reason or due to some health issues or
illnesses the director would be able to defend himself against the accusations on him. In
furtherance the director would also need to prove that he would have taken definitive steps for
the safeguard of the company against incurring debts or losses if he was present at the time when
the debts or losses were ‘incurred’.
5
The directors could avail the ‘defense of safe harbor’ mentioned under section 588GA of
the Corporations Act 2001 (Cth). For defense against allegations of misconducts of the directors
against the company the directors are provided with ‘defense of safe harbor’ in the section. The
directors can further be seen to be safeguarded from the liabilities of accusations of trading
during insolvency by the section 588GA (1).
The directors can mention the fact that they have taken reasonable care of company since
they had knowledge that company was being insolvent and the directors can show that they have
been taken certain measures and courses of actions to lessen the effects of the insolvency the
directors would be eligible to claim for the defense of safe harbor. In furtherance a claim could
be made by the directors for forming a plan of restructure that would overcome the company’s
insolvency.

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However in the present case it is quite unlikely for directors to receive any of the
remedies mentioned in the above paragraphs. The directors were seen to be indulged in
‘insolvent trading’ and also are liable for their involvement in various discrepancies, breaches of
their duties and misconduct that had been mentioned under the Corporations Act 2001 (Cth). The
directors were found to be misusing their position in the company to use the company’s fund for
their own benefits and further they had been accused of hiding important financial information
from shareholders and investors. Hence it can be seen that it would be unlikely that directors
could be able to defend themselves under the provisions of ‘safe harbor’ under the section
588GA of the Corporations Act 2001 (Cth).

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Reference
Corporations Act 2001 (Cth)
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 harbor. Company Director, 33(6), 28.
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.
Inner West Demolition (NSW) Pty Ltd v Silk [2018] NSWDC 136
Marsh, S., & Roberts, S. (2017). Personal liability for insolvent trading: Company directors find
berth in safe harbour. Governance Directions, 69(10), 611.
Perrine v Carrello [2017] WASCA 151
Sutherland v Hanson Construction Materials Pty Ltd (2009)