Corporations Law LLW2004 Assignment: Director's Duties and Liabilities

This report analyzes the legal obligations and potential liabilities of directors under the Corporations Act 2001 (Cth), specifically focusing on a case involving Gemsales Pty Ltd. The report examines the duties of care and diligence (s 180(1)) and the prohibition against insolvent trading (s 588G). The analysis considers the actions of directors Andrew, Brian, and Colin in relation to a loan obtained to expand the company's business. The report assesses whether the directors breached their duties and if any defenses, such as those provided under s 180(2) or s 189, are available to them. The report utilizes relevant case law, including ASIC v Healey & Ors, ASIC v Hellicar & Ors, and Daniels v Anderson, to support its conclusions. The report also explores the recent trends in breach of duties by directors, referencing statistics from the Australian Securities and Investment Commission (ASIC). The analysis concludes with a determination of the liabilities of each director and the availability of any defenses under the Act.

Running head: CORPORATIONS LAW
Corporations Law
Name of the Student
Name of the University
Author Note

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Introduction
Duties of a Director
As per the provisions contained in CA 2001, s 180(1)1, the directors appointed in a company are
under an obligation to display a carefulness and diligence of appropriate extent in all their endeavours that
has been adopted in the furtherance of conducting the business of the company. The interpretation of the
extent of carefulness and diligence is required to be construed as per the extent to which a man of
reasonable prudence would adopt if have been made face circumstances that has been presented to the
director who has been alleged to have reached the same.
As per the provisions contained in CA 2001, s 1812, the individuals appointed as directors of a
company is under a liability to look after the wellbeing of the company and inflict good faith in the
actions taken in the furtherance of the same. All the actions adopted by the directors is to be for a proper
purpose served with respect to the company.
As per the provisions contained in CA 2001, s 1823, the individual appointed as a director in
certain company inflict their abstinence from achieving any game of private nature from the affairs of the
company which has the probability of causing detriment towards the company.
As per the provisions contained in CA 2001, s 588G4, all the individuals who are appointed in the
designation of a director in any company should not allow the company or himself adopt any debt or
trading with respect to the company when there is a probability of the company or belief that the company
would declare insolvent in case of any further trading be continued by the same.
1 The Corporations Act 2001 (Cth), s 180(1)
2 The Corporations Act 2001 (Cth), s 181
3 The Corporations Act 2001 (Cth), s 182
4 The Corporations Act 2001 (Cth), s 588G

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As per the provisions contained in CA 2001, s 1905, when the director of a company delegates his
powers or actions to another person, director is under an obligation to undertake all the liabilities that the
actions of such delegate has brought about towards the company.
Recent Trends in Breach of Duties by Directors
The recent reports presented by the Australian Securities and Investment Commission have
depicted an alarming increase in the rate of insolvent trading cases that have been reported incurring civil
liabilities for the directors under the Corporations Act. As per the report, in 2017-18 there have been
reported 4505 cases in relation to insolvent reading out of which 70 9.3 % over the estimated debts of the
company has been visible to have incurred during the the worth of the company falling below the
threshold of 1 million dollars. Two findings have been arrived upon by the report that depicts the breach
of the provisions under s 588G & s 180(1) CA underlying most of the cases of insolvency or insolvent
trading6.
Fiduciary Relationship
Fiduciary relationship has been a part of the law of agency under which the agents needs to act in
a cautious manner for ensuring the welfare of their principal, under whose authorisation or behalf they
have been conducting the business. This promotion of the welfare of principal is also imposed upon the
directors of a company who are received as the agents of the company. This requires all the actions of the
director to have been taken under the contention of causing welfare of the company7.
General Law Duties
The Corporations Act have been formulated under the influence of the common law that has been
prevailing with respect to the corporations. All the duties of the directors that have been inculcated within
5 The Corporations Act 2001 (Cth), s 190
6 asic.gov.au, Download.Asic.Gov.Au (Webpage, 2019) <https://download.asic.gov.au/media/4936726/rep596-
published-14-november-2018.pdf>.
7 Barker, Sarah. "An introduction to directors’ duties in relation to stranded asset risks." (2018) Stranded Assets and
the Environment. Routledge. 221-271.

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the statute has a basis in the general law duties which has been further enhanced for the purpose of
enumerating the statutory duties. The duties of a director under the general law can be listed as follows.
 The first general law duty of a director is the duty to ensure good faith in their actions to cause
welfare to the company.
 The second general law duty of a director is to make the director refrain from accruing any
personal benefit from the affairs of the company.
 The third general law duty of a director is the duty to ensure consciousness and diligence while
conducting affairs of the company8.
Summary of Facts
In the given scenario, Gemsales Pty Ltd has three directors namely Andrew, Brian and Colin
and the company has been involved in the business of wholesale jewellery which involved mainly
supplying and importing. For expanding the competitive market the company decided to escalate their
sales by lowering the prices. This has led the company to obtain a loan of 4 million dollars from
Friendly Bank Ltd. The meeting in which such a decision has been taken has been attended by only
Brian and Andrew who voted for the same and Colin could not attend the meeting because of his
serious accident, which made him to get admitted in the hospital. Subsequently, the company has
been declared as insolvent and issue arising from the given situation is whether the directors have any
legal obligations under the CA 2001 with respect to their actions. Whether Andrew can avail the
defence provided under the statute for the said contravention.
Part 1
Issue 1
Whether any liability has been incurred by Andrew, Brian and Colin under the provisions of
CA 2001, s 180(1) regarding his duty as a director of the company. Whether any contravention of the
duty to refrain from insolvent trading has been exhibited by them as per CA 2001, s 588G.
Law
8 Keay, Andrew. "The shifting of directors' duties in the vicinity of insolvency." (2015) International Insolvency
Review 24.2: 140-164.

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As per the provisions contained in CA 2001, s 180(1)9, the directors appointed in a company are
under an obligation to display a carefulness and diligence of appropriate extent in all their endeavours that
has been adopted in the furtherance of conducting the business of the company. The interpretation of the
extent of carefulness and diligence is required to be construed as per the extent to which a man of
reasonable prudence would adopt if have been made face circumstances that has been presented to the
director who has been alleged to have reached the same.
As per the provisions contained in CA 2001, s 588G10, all the individuals who are appointed in
the designation of a director in any company should not allow the company or himself adopt any debt or
trading with respect to the company when there is a probability of the company or belief that the company
would declare insolvent in case of any further trading be continued by the same.
As per the provisions contained in CA 2001, s 18911, when the director has been relying upon the
information or suggestions that has been provided to them by others will only provide immunity to the
directors if such reliance has been exercised by the director under immense good faith. This reliance can
only be made with respect to the advisor suggestions made by another director of the company, an
employee belonging to the company, any officer of the company or in expert opinion belonging to that
particular field. The reliance needs to be reasonable and after an adequate assessment of independent
nature being carried out by the director.
As per the provisions contained in CA 2001, s 19012, when the director of a company delegates
his powers or actions to another person, director is under an obligation to undertake all the liabilities that
the actions of such delegate has brought about towards the company.
9 The Corporations Act 2001 (Cth), s 180(1)
10 The Corporations Act 2001 (Cth), s 588G
11 The Corporations Act 2001 (Cth), s 189
12 The Corporations Act 2001 (Cth), s 190

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The directors of a company are to abide by the duty that they have been imposed with to ensure
diligence and take actions cautiously while conducting the affairs in relation to the business of the
company. This can be illustrated with the case of ASIC v Healey & Ors [2011] FCA 71713.
The records in relation to the meetings kept by the company are to be taken as records that
evidences the decisions and discussions of the meetings. This can be illustrated with the case of ASIC v
Hellicar & Ors [2012] HCA1714.
The claim of ignorance, in experience or even absence of knowledge should not be utilised by the
directors as an immunity to avoid liability for the contravention of consciousness and diligence in their
actions. This can be illustrated with the case of Daniels v Anderson (1995) 37 NSWLR 43815.
Application
Colin: Colin has not been present in the meeting where the decision has been taken as he has been
recovering from a serious accident and has been exhibiting reliance upon the other directors with respect
to the same. In this situation, he has been justified in relying upon the decision of the other directors as
being the directors the others are also expected to exercise due diligence. Hence, Colin would not be held
liable as he has been protected under CA 2001, s 18916.
Andrew: In the present case, Andrew has been present in the meeting where he has decided and
voted for the availing of the loan, which has the probability of pushing the company towards insolvency.
This is because the company has been resolving to reduce the prices to enhance the competition. The
lowering of the prices without any proper substantiation backing the same cannot be said to have been
diligent decision taken by the directors of a company. Hence, Andrew would be held liable under the
13 ASIC v Healey & Ors [2011] FCA 717
14 ASIC v Hellicar & Ors [2012] HCA17
15 Daniels v Anderson (1995) 37 NSWLR 438
16 The Corporations Act 2001 (Cth), s 189

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contravention of s 180(1), CA 200117. Moreover, this action has made the company to be declared as
insolvent holding Andrew liable under s 588G, CA 200118.
Brian: In the present case, Brian has been present in the meeting where he has decided and voted
for the availing of the loan, which has the probability of pushing the company towards insolvency. This is
because the company has been resolving to reduce the prices to enhance the competition. The lowering of
the prices without any proper substantiation backing the same cannot be said to have been diligent
decision taken by the directors of a company. This depicts towards the involvement of Brian in the
contravention of s 180(1), CA 2001. Moreover, this action has made the company to be declared as
insolvent holding Brian liable under s 588G, CA 2001.
Conclusion
A liability has been incurred by Andrew and Brian under the provisions of CA 2001, s 180(1)
regarding his duty as a director of the company. A contravention of the duty to refrain from insolvent
trading has been exhibited by them as per CA 2001, s 588G. However, Colin would be protected under
CA 2001, s 189.
Part 2
Issue
Whether any defence has been available for Andrew under the CA 2001.
Rule
As per the provisions contained in CA 2001, s 180(2)19, the directors of a company are protected
from being held liable for breach of their duties under the statute if it has been established by them that
17 The Corporations Act 2001 (Cth), s 180(1)
18 The Corporations Act 2001 (Cth), s 588G
19 The Corporations Act 2001 (Cth), s 180(2)

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they have undertaken all the actions under belief of their actions being most appropriate in the given
situation.
Application
In this case, Andrew has been present in the meeting where he has decided and voted for the
availing of the loan, which has the probability of pushing the company towards insolvency. This is
because the company has been resolving to reduce the prices to enhance the competition. The lowering of
the prices without any proper substantiation backing the same cannot be said to have been diligent
decision taken by the directors of a company. This cannot be treated as the most appropriate action that
could have been taken.
Conclusion
No defence has been available for Andrew under the CA 2001.

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Bibliography
ASIC v Healey & Ors [2011] FCA 717
ASIC v Hellicar & Ors [2012] HCA17
asic.gov.au, Download.Asic.Gov.Au (Webpage, 2019)
https://download.asic.gov.au/media/4936726/rep596-published-14-november-2018.pdf
Daniels v Anderson (1995) 37 NSWLR 438
The Corporations Act 2001(Cth)
Keay, Andrew. "The shifting of directors' duties in the vicinity of insolvency." (2015) International
Insolvency Review 24.2: 140-164.
Barker, Sarah. "An introduction to directors’ duties in relation to stranded asset risks." (2018) Stranded
Assets and the Environment. Routledge. 221-271.