Corporation Law: Directors' Responsibilities and Liabilities

This document provides a comprehensive analysis of a corporation law assignment, addressing key issues related to directors' duties, insolvent trading, and legal liabilities under the Corporations Act 2001. The assignment explores scenarios involving directors' breaches of duty, including insolvent trading, and the potential legal actions that can be taken by the Australian Securities and Investments Commission (ASIC). The solution examines the application of Section 588G, which deals with insolvent trading, and Section 183, which concerns the misuse of company information. It also covers the penalties that ASIC can impose, including disqualification from managing companies, fines, and compensation claims. Furthermore, the assignment addresses the legality of a director engaging in business with another company and the implications of using a company's client list. The document provides detailed legal arguments, case law references, and conclusions for each issue, offering a clear understanding of corporate law principles.

Running head: CORPORATION LAW
CORPORATION LAW
Name of the Student
Name of the University
Author Note

1CORPORATION LAW
Question 1
Issue
The issue here is to determine if Liam and Peta can be pursued legally by the ASIC. In
this case Liam and Peta are directors of a company that has not been able to meet its debt
obligations and tax liabilities. It continued to transact under the instructions of its directors.
Rule
The Corporations Act, 2001 provides for a prohibition on insolvent trading. This thus
means that when a company is insolvent or if it will possibly become insolvent soon the directors
of a company must ensure that the company ceases transactions. This is mainly provided for to
ensure that company does not incur any further debts when it is already unable to meet its debt
obligations. This prohibition and the related statutory of directors in relation to the same are
provided for in Section 588G of the Corporations Act, 20011. Section 588G (3) also states that
when a company is insolvent and it continues to transact dishonestly the directors would be
committing a criminal offence2.
The act also states at Section 95A (1) of the act that a company that is unable to meet its
debt obligations would not be considered to be solvent. Section 95A (2) of the act provides that a
company that cannot be considered solvent by virtue of Section 95A (1) would be deemed
insolvent3.
1 Chen, Vivien, Ian Ramsay, and Michelle Welsh. "Corporate law reform in Australia: An analysis of the influence
of ownership structures and corporate failure." (2016).
2 Hayne, K. M. "Directors' duties and a company's creditors." Melb. UL Rev. 38 (2014): 795.
3 Du Plessis, Jean Jacques. Disqualification of Company Directors: A Comparative Analysis of the Law in the UK,
Australia, South Africa, the US and Germany. Taylor & Francis, 2017.

2CORPORATION LAW
Application
The facts and circumstances of the case make it evident that the company was unable to
meet its debt obligations. This thus meant that the company would be considered insolent as per
the provisions of Section 95A (1) of the act. The company continued to transact despite being
insolvent and thus both the directors were in breach of their obligation under Section 588G of the
act. This thus meant that ASIC could invoke civil penalties for the same on behalf of the
company.
Liam however was suffering from cancer and thus was terminally ill. This is the reason
he could not inform himself regarding the financial position of the company. Thus he continued
to instruct the company to transact but was not aware of the insolvent status of the company and
thus he was not acting dishonestly. Thus he cannot be pursued legally under criminal charges
under the provisions of Section 588G (3).
Conclusion
Thus ASIC could initiate civil proceedings against both the directors. However, ASIC
could only pursue Peta under criminal charges as Liam was not acting dishonestly and thus was
not in breach of Section 588G (3) which attributes criminal liability.
Question 2
Issue
The issue here is to determine the penalties that can be awarded by ASIC for civil and
criminal penalties.

3CORPORATION LAW
Rule
In case of civil proceedings ASIC can award the following penalties4:
1) It may disqualify the directors from managing companies in the future.
2) It may impose a substantial fine.
3) It can also demand for compensation to the company for losses that have been incurred
by creditors of the company as per the provisions of Section 588J of the Corporations
Act, 2001.
In case of criminal liabilities the ASIC can legally pursue the directors for compensation
to the company for the losses incurred by the creditors as provided for in Section 588K of the
act5.
Application
Thus for the breach of their duties the ASIC can pursue the directors legally for their
breach of statutory duties. Under civil actions they can apply for the following penalties:
I. It may disqualify the directors from managing companies in the future.
II. It may impose a substantial fine.
III. It can also demand for compensation to the company for losses that have been incurred
by creditors of the company as per the provisions of Section 588J of the Corporations
Act, 2001.
4 Alevras, A., and Jean Du Plessis. "The Payment of Dividends: Legal Confusion, Complexities and the Need for
Comprehensive Reform in Australia." Co. Secur. Law J(2014): 312-333.
5 Godwin, Andrew. "Teaching Transactional Law-A Case Study from Australia with Reference to the US
Experience." Transactions: Tenn. J. Bus. L. 16 (2014): 343.

4CORPORATION LAW
Under criminal proceedings they can claim compensation to the company from Peta for
the dishonest insolvent trades undertaken by the company. This would follow the provisions of
Section 588K of the Corporations Act.
Conclusion
Thus the ASIC would be entitled to disqualify the directors from managing companies in
the future, impose substantial fines and claim compensation under Section 588J of the act.
Under the criminal actions ASIC is entitled to claim compensation as provided for
Section 588K of the act.
Question 3
Issue
The issue here is to determine if the directors of CloudTech can pursue Alexandra for the
contract between Banger Pty Ltd and Gnosis Records.
Rule
It has been determined through jurisprudence that a company is separate legal entity and
thus can sue and be sued in its own name. Thus it is not the same as its owners. This has been
reiterated in Salomon v A Salomon and Co Ltd [1897] AC 226.
There is also no restriction in the Corporations Act, 2001 preventing an individual from
being a director of two companies. This is legally permissible as long as there is not conflict of
interest.
6 Coggins, Jeremy, Bianca Teng, and Raufdeen Rameezdeen. "Construction insolvency in Australia: reining in the
beast." Construction Economics and Building 16.3 (2016): 38-56.

5CORPORATION LAW
Application
Alexandra incorporated her own company Banger Pty Ltd and entered into a contract
with Gnosis Records. CloudTech had already resolved at a meeting that it would not bebidding
for the contract with Gnosis Records and thus there was no conflict of interest in Alexandra’s
company entering into such a contract.
Conclusion
Thus the directors of CloudTech cannot legally pursue Alexandra for the contract
between Banger and Gnosis Records.
Question 4
Issue
The issue here is to determine if Alexandra can be legally pursued for her use of
CloudTech’s client list.
Rule
Section 183 of the Corporations Act, 2001 provides that a director of a company has a
statutory duty to ensure that any information that is obtained by the director by virtue of his/her
position must not be used to get an unfair advantage for themselves or for a third party 7. This
information also cannot be used to cause detriment to the company. This duty continues to
operate even if the person is no longer in that position in that organization.
7 North, Gillian. Company disclosure in Australia. Thomson Reuters (Professional), 2013.

6CORPORATION LAW
Application
Alexandra obtained the client list due to her position as a director of the company. He
used this to solicit clients for banger and thus this was a breach of her duties under Section 183
of the Corporations Act, 20018.
Conclusion
Thus the directors of CloudTech can legally pursue Alexandra for the breach of her
statutory duties under Section 183 of the Corporations Act, 2001.
8 Hannan, Neil. "A case for insolvency law reform in Australia." Australian Restructuring Insolvency & Turnaround
Association Journal 30.1 (2018): 30.