TLAW 402 Company Law Assignment: Directors' Duties and Consequences

This document presents a comprehensive solution to a Corporation Law assignment. The assignment focuses on a scenario involving Shilpa and Sonal, directors of Sonu Pty Ltd, and examines their responsibilities under the Corporations Act 2001 (Cth). The solution analyzes potential breaches of directors' duties, including those related to financial management, insolvent trading, and record-keeping. It explores the powers of a liquidator to pursue directors for breaches and the potential civil and criminal penalties they may face. The analysis covers relevant sections of the Act, such as those concerning directors' duties (sections 180-183), insolvent trading (section 588G), financial records (section 344), and the consequences of breaches (sections 1317E and 1317G). The solution concludes that the liquidator, Sonali, can likely sue both directors for infringing their duties, with Shilpa being primarily liable but Sonal also potentially responsible. The document provides a detailed legal analysis of the case, including the application of relevant legislation and case law.

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

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Answer (a):
Issue:
The present answer is dealing with the issue of whether Sonali, a liquidator can sue
Shilpa and Sonal to recover the debts incurred by the company run by them.
Rules:
The present case can be analyzed in the light of the Corporations Act 2001 (Cth ). The
directors of a company are provided with certain duties which they are bound to follow. The
directors are bound to follow the general duties given under section 180 to 183 of the said act.
These duties are often regarded as the civil liabilities of the directors. Section 180 provides that
the directors are required to exercise their powers and perform their duties carefully and
diligently like a reasonable person would be obliged to perform these duties being the director of
the company. Section 181 states that the directors are needed to act in good faith to incur the best
interest of the company. These two duties given under sections 180 and 181 are denoted as the
positive obligations of the directors.
On the other hand, sections 182 and 183 provide the negative obligations of the directors.
Section 182 states that director must not misuse his position to benefit himself personally or for
others by causing detriment to others. Similarly, section 183 held that directors shall not
misappropriate any information received by them because of the position of directors causing
detriment to the company in order to gain profits for themselves or for others.
Section 184 of the act states that a director will be liable for a criminal offence if it is
discovered that the director is reckless and dishonest and also does not perform his duties in good

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faith for the best output for the company. In addition to this, the said section also provides that if
a director recklessly or dishonestly misuses his position with an aim of achieving any personal
undue gain by causing detriment to the company, will be liable as per the section. Similarly, if
the directors misappropriate any information received by him, because of his position as a
director, in a reckless or dishonest manner to incur any personal gain or interest that may result
into loss or detriment to the company; he will be held liable under section 184. This section 184
provides a criminal liability on the directors of a company and its violation will lead to criminal
penalty to be imposed on the directors.
Another important duty of the directors is to prevent insolvent trading as laid down in
section 588 G of the said act (Marsh and Roberts 2017). This duty is imposed on the directors to
safeguard the interest of creditors like investors, share holders and others. After a liquidator is
appointed, he is required to investigate the company affairs during the period just before the
liquidation. The liquidators must consider whether the directors have performed their duties as
per the provisions of the act (Hedges et al. 2016). The liquidators before bringing any action
against the directors must lodge a report with ASIC as per section 533 of the act. ASIC will then
make a review of the matter and if required, may prosecute the directors in the court.
The liquidators are provided with certain powers as per section 477. Section 477(2) states
that a liquidator is empowered to institute or defend any suit in the court in the name as well as
on behalf of the company. He can even appoint a solicitor to assist him to perform his
responsibilities. He has the power to even sell or dispose any part or all of the company’s
properties. He can also initiate to wind up the company and make distribution of its funds among
its creditors.

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Section 588 FDA of the act empowers the liquidators to pursue the directors if they are
involved in to any unreasonable or disputing transaction. The liquidator has to prove certain
criteria to establish that the transaction made by the directors is unreasonable. The liquidator can
pursue a director for making any unjustified disposition or payment where it is seen that any
reasonable person in such situation will not make such transaction or disposition. The court will
determine this by considering and applying shift and weigh principle of calculating the loss and
profit that may be incurred by the company from that transaction.
Thus as per section 588 FDA the liquidators are given a very wide scope and limit to
consider and pursue the transactions made by the directors. Apart from these, section 588 FGA
provides the provision to be considered by the liquidators when a company is to be wound up. If
the liquidator finds that a preferential payment is made to the ATO or the Australian Taxation
Office by the company to be wound up, he may take actions to recover such payment. If the
liquidator is able to seek an order for the preferential payment against from the court against the
ATO, section 588 FGA provides the directors to have a liability to the ATO for that preferential
payment.
Moreover, the directors also have a duty keep and maintain financial records as per
section 344 (1) of the act.
The liquidators shall also consider and investigate the company affairs before instituting a
suit against the directors. If they find that the directors have infringed any of the above
mentioned duties of the directors, he will file a report with ASIC according to the provisions
given in section 533 of the act.

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Application:
From the facts of the given case, it is observed that Sonal and Shilpa established a small
proprietary company ‘Sonu Pty Ltd’ that conducts a small cosmetic jewellery store. They both
are the directors as well as the shareholders of the company. Shilpa owns an accounting degree
and she looks after the finances of the company. She holds the post of managing director of the
company. Sonal on the other hand manages the administration of the company business.
On January 2nd 2019, Sonal received a call from one of the company’s suppliers named
JewelCo, demanding payment. On 14th January, she again receives call from JewelCoabout the
payment. When Sonal informed this to Shilpa, the latter replied that she has already paid it.
Shilpa had paid by using credit card of the company which exceeded its limit already. This
showed that Shilpa has not performed his duty diligently and carefully. Hence section 180 is
breached.
It is seen that though Sonal is unaware but the company is living on credit for 2018
totally. This showed that the company is approaching towards insolvency since 2018 and the
directors were involved in insolvent trading, thus violating section 588 G (Keay 2015).
Moreover, it is seen that Shilpa did not keep proper financial records since 1st October
2018. It breached section 344(1) of the act.
On 10th March 2019, Sonal attempted to use the credit card of the company but it was
rejected as there was insufficient funds. Thus the company is already insolvent by them. The
directors did not take any measure to prevent it though. Later on 20th March, the bank authority
informed Sonal that no future dealings will be permitted by the bank as their company has
crossed its limit of transactions and even did not pay the dues for the last 3 months. Thus the

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directors did not keep the track of the transactions of the company and crossed the limit of credit
set by the bank. Thus they breached did not act in good act to incur benefits for the company thus
violating section 181. Moreover, they misuse their position and information to cause detriment to
the company as Shilpa must have well ideas of the company’s financial conditions still they did
not stop using credits from the bank, causing breach of sections 182 and 183. In addition, they
used the funds recklessly without considering the funds of the company being going down.
Hence, the liquidators can use their powers under section 588 FDA to pursue the
directors who can be held liable to the ATO (Qu 2019). Shilpa being the managing director is
mainly liable for the breach of duties, however, Sonal can be held responsible as she was also the
director of the company. But this is subject to the discretion to the court.
Conclusion:
From the above discussion, it can be held that the liquidator Sonali can sue bothe the
directors for infringing their duties as directors and the liquidator is likely to succeed against
them in court.
Answer (b)
Issue:
The issue to be decided is what the possible consequences are for Shilpa and Sonal for
the breach of Corporations Act 2001 (Cth).
Rules:
In this aspect, section 1317E of the said act is to be considered. According to this section,
if the court recognizes that the director has contravened any civil penalty provisions provided in

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the Act, it will declare such contravention (Hedges and Ramsay 2016.). Then the ASIC will
provide a pecuniary penalty as per section 1317 G or order for disqualification from the director
post.
Under 1317G section, for the contravention of Civil penalty provision, the court will
order for a pecuniary penalty of the amount which is greater between 5000 penalty units and the
amount multiplied by 3, to be decided by the court as the benefit derived and loss avoided for
such the contravention. While ordering for pecuniary penalty, the court will take into account the
nature of such contravention, the resulting loss due to it, the situation during which it happened
and whether the directors is a repetitive offender. When sections 180 – 183, 344 and 588 G are
infringed, civil penalties are awarded.
On the other hand, breach of section 184, criminal penalty is imposed which consists of
200 units of penalty or 5 years imprisonment or both.
Application:
According to the case study, the managing director Shilpa and other director Sonal have
breached the duties given under sections 180- 183, 344 and 588G , for which civil penalties will
be awarded. Besides, they violated provisions of section 184 for which criminal penalty will be
awarded. However, it is seen that the outstanding dues of the company is about 275,000$, but the
assets and property are not enough to meet this amount of debt. Hence additional amount can be
realized from the directors personally.
Moreover, it is likely that the liability of Sonal will be considered by the court as she was
mainly responsible for all these defaults.

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Conclusion:
Thus the possible consequences for Sonal and Shilpa are likely to civil penalties mainly
in addition to criminal penalty for the breach of their duties.

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References:
Hedges, J. and Ramsay, I., 2016. Has the Introduction of Civil Penalties Increased the Speed and
Success Rate of Directors’ Duties Cases?. Company and Securities Law Journal, 34(7), pp.549-
554.
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.
Keay, A., 2015. The shifting of directors' duties in the vicinity of insolvency. International
Insolvency Review, 24(2), pp.140-164.
Marsh, S. and Roberts, S., 2017. Personal liability for insolvent trading: Company directors find
berth in safe harbour. Governance Directions, 69(10), p.611.
Qu, C.Z., 2019. The court's power to appoint provisional liquidators to carry out rescue roles:
Rethinking Legend. International Insolvency Review.
The Corporations Act 2001 (Cth).