Corporations Law Take Home Test 2: Curtin University, Semester 2, 2019

This Corporations Law assignment, completed for Curtin University's BLAW5016 course, analyzes the responsibilities of company directors concerning their duty of care and diligence, particularly in the context of climate change risks. The assignment examines a scenario involving an Australian public company, Exotic Ltd, and its directors' failure to address the impact of climate change on their business, leading to financial difficulties and potential breaches of the Corporations Act, specifically section 180. It references legal principles derived from the Corporations Act 2001 (Cth), relevant case law like ASIC v Rich, ASIC v Healey (Centro case), and the Supplementary Memorandum of Opinion by Mr. Noel Hutley SC and Mr. Sebastian Hartford Davis. Furthermore, the assignment explores the issue of insolvent trading under section 588G, assessing whether directors can be held liable for taking loans that contribute to a company's insolvency, considering available defenses under section 588H. The analysis highlights the importance of directors' awareness of climate-related risks, adherence to financial reporting standards, and proactive management to avoid potential breaches of their duties and associated legal consequences.

Running head: CORPORATIONS LAW
CORPORATIONS LAW
Name of the Student:
Name of the University:
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Curtin Law School
BLAW5016 and MT565 Fundamentals of Business and Corporations Law
Take Home Test 2 – Semester 2, 2019
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a) Five Australian articles
1. Barker, Sarah, et al. "Climate change and the fiduciary duties of pension fund
trustees–lessons from the Australian law." (2016) Journal of Sustainable Finance &
Investment 6.3: 211-244.
Link: https://www.tandfonline.com/doi/full/10.1080/20430795.2016.1204687
2. Linnenluecke, Martina K., Andrew Griffiths, and Peter J. Mumby. "Executives’
engagement with climate science and perceived need for business adaptation to
climate change." (2015) Climatic change 131.2: 321-333.
https://link.springer.com/article/10.1007/s10584-015-1387-1
3. Bremer, Josephine, and Martina K. Linnenluecke. "Determinants of the perceived
importance of organisational adaptation to climate change in the Australian energy
industry." (2017) Australian Journal of Management 42.3: 502-521.
https://journals.sagepub.com/doi/abs/10.1177/0312896216672273
4. Pielke, Roger A., Rezaul Mahmood, and Clive McAlpine. "Land’s complex role in
climate change." (2016) Phys. Today 69: 40-46.
http://www.atmo.arizona.edu/students/courselinks/spring17/atmo336s2/lectures/
sec5/Pielke_PhysicsToday_2016.pdf
5. Nyberg, Daniel, and Christopher Wright. "Performative and political: Corporate
constructions of climate change risk." (2016) Organization 23.5: 617-638.
https://journals.sagepub.com/doi/abs/10.1177/1350508415572038
b) Concerned area of law
The issue here to be discussed is whether the directors belonging to the exotic ltd, an
unlisted company are responsible for breach of the duties as directors.

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Legal principles involved
A perusal of the Corporations Act1 will enable to discuss the present issues. The Act
controls and regulates matters related to the formation as well as operation of a company
incorporated in Australia along with the duties of the officers like directors involved in it. It
basically provides the laws that are concerned with the business entities operating from
Australia.
In order to analyze the present scenario, section 1802 of the said Act must be referred
which provides the duty of care as well as diligence of the directors as well as officers of the
company. The directors of a company are not ornaments of the same but they form an important
part of corporate governance. Sub section 13 states that the directors of a company along with
other officers are under the obligation to exercise the powers conferred upon him and perform
their duties with proper care and diligence. Such standard of care and diligence must be such that
it will be similar to a reasonable person who if be present in the place of the directors will act in
that manner. It is actually provision imposing civil penalty.
Section 180(1) provides the standard that is required to be followed by the directors and
they must adhere to it as long as they hold such positions. It was held in the case of Australian
Securities and Investments Commission v Rich4 that the statutory duty of care and diligence
given under this section of 180(1) must be according to the standard that is usually found in
general law. In this case, proceedings had been initiated against the directors of a company
named as One Tel Ltd alleging that they have breached the statutory duties of acre and diligence.
1 Corporations Act 2001 (Cth).
2 Corporations Act 2001 (Cth) s180.
3 Corporations Act 2001 (Cth) s180(1).
4 Australian Securities and Investments Commission v Rich (2009) 75 ACSR 1, 627 [7254].

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Further in ASIC v Cassimatis (No 8)5, it was held that when the director is not careful or
diligent when performing his duties being the company’s director, he will be liable to civil
penalty as per the said section in accordance to section 1317E of the said Act6.
In order to ensure that the directors have exercised proper care and diligence while
performing their functions while holding the position of director, the directors must consider the
effect of climatic changes on their business and also analyze the risks that can be foreseen that
may affect the interest of the company7. In this regard, the Supplementary Memorandum of
Opinion can be referred prepared by Mr Sebastian Hartford Davis and Mr Noel Hutley SC. It
provides that the foreseeable risks of a company also include climatic risks like physical,
litigation as well as transition risks8. In this situation, the directors are required to be alert and
take prudent and strong steps which may include informing themselves as well as other
significant officers of the company, disclose the matter in the frameworks pertaining to financial
reporting. They are also required to necessary steps that deemed to be fit and perfect in that
situation considering the gravity of the upcoming harm, risk that can be incurred and also the
burden of the steps taken. Moreover, if the directors cannot take into consideration the risks
incurred due to change in the climatic conditions will make them liable for the breach of their
duties to take care and diligence as given under section 180(1)910.
5 ASIC v Cassimatis (No 8) [2016] FCA 1023.
6 Corporations Act 2001 (Cth) s1317E.
7 Linnenluecke, Martina K., Andrew Griffiths, and Peter J. Mumby. "Executives’ engagement with climate science
and perceived need for business adaptation to climate change." (2015) Climatic change 131.2: 321-333.
8 Barker, Sarah, et al. "Climate change and the fiduciary duties of pension fund trustees–lessons from the Australian
law." (2016) Journal of Sustainable Finance & Investment 6.3: 211-244.
9 Pielke, Roger A., Rezaul Mahmood, and Clive McAlpine. "Land’s complex role in climate change." (2016) Phys.
Today 69: 40-46.
10 Corporations Act 2001 (Cth) s180(1).

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In a very recent case of Australian Securities and Investments Commission v Healey11,
popularly known as the Centro case, the directors belonging to the Centro Companies were held
liable for the breach of section 180(1) along with some other relevant sections as they have failed
to perform with care and diligence. Such duty to act with acre and diligence is also related to the
approval of financial statements of the company. Financial reports help to analyze the financial
risks that can be incurred by any company. If the directors are reluctant to certify the fairness and
truth of these reports then they are liable for breaching the said section.
In another case of Australian Securities and Investments Commission v Macdonald (No
11) 12, the company director was held liable for breaching section 180(1) of the Act for his failure
to supply and approve proper financial statements that have been issued by the company.
Moreover in ASIC v Vines13, the company director can be held liable under section 180(1)
if he failed to incorporate the risks due to climate change14.
Application:
As per the facts of the case, a listed public company of Australia named as Exotic Ltd
deals with providing luxurious as well as exotic holidays in Pacific island. It is also involved in
operating a water –front resort. The company is operated and controlled by Joel who is the
managing director and Bill and Bibi who are the two non executive directors of the company. In
the next meeting to be conducted the directors are require to address a serious problem of algae
blooming in the water front of the resort and is required to be treated son as the guests cannot
11 Australian Securities and Investments Commission v Healey [2011] FCA 717.
12 Australian Securities and Investments Commission v Macdonald (No 11) [2009] NSWSC 287.
13 ASIC v Vines [2003] NSWSC 1095.
14 Nyberg, Daniel, and Christopher Wright. "Performative and political: Corporate constructions of climate change
risk." (2016) Organization 23.5: 617-638.

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swim or enjoy in it. Pacific Algae Treatment Inc, the company that was providing treatment did
not work anymore as its payments are not paid by Exotix ltd. The directors are required to seek
loan from Shark Finance Pty Ltd for getting treatment to solve the issue of algae bloom. In the
meeting, the directors agreed to take loan but they did not consider the reason behind such bloom
which is the climatic change actually. Moreover this algae bloom has affected the entire island
due to which people have stopped availing holidays here. This has resulted into the reduction in
the airlines operation. Moreover, due to the algae treatment, the company has increased its
service price. Thus the number of tourists who are visiting the place are not ready to pay
increased price of the resorts. Finally as an effect of all these, the company turns insolvent.
This is mainly due to the failure of the directors as they are not aware of the current
climatic changes that are leading to the algae bloom. Moreover, they are reluctant to research on
this matter and they blindly believed whatever has been said by the Pacific Algae Treatment Inc.
in addition to these, the fact that the algae bloom is made public is a foreseeable risk that can be
easily considered by the company. Thus no considering it will definitely lead to the
contravention of section 180(1) of the Act. This can be supported by Australian Securities and
Investments Commission v Healey15 where the directors belonging to the Centro Companies were
held liable for the breach of section 180(1) along with some other relevant sections as they have
failed to perform with care and diligence. Such duty to act with acre and diligence is also related
to the approval of financial statements of the company.
The directors are required to be alert and take prudent and strong steps which may
include informing themselves as well as other significant officers of the company, disclose the
matter in the frameworks pertaining to financial reporting. They are also required to necessary
15Australian Securities and Investments Commission v Healey [2011] FCA 717.

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steps that deemed to be fit and perfect in that situation considering the gravity of the upcoming
harm, risk that can be incurred and also the burden of the steps taken. Moreover, if the directors
cannot take into consideration the risks incurred due to change in the climatic conditions will
make them liable for the breach of their duties to take care and diligence as given under section
180(1)16.
Conclusion:
The directors belonging to the exotic ltd, an unlisted company are responsible for breach
of the duties as directors.
c) Concerned area of law:
The issue involved in the present scenario is that whether Bill along with other directors
of the company can be made liable for taking the loans which in turn the company insolvent and
whether they can claim any defence to evade from such allegation and liability.
Legal principles involved:
A perusal of the Corporations Act 2001 (Cth) will enable to discuss the present issues. In
order to analyze the present scenario, section 588G17 of the said Act can be perused. Section
588G(1)18 enumerates the provisions related to the duty of the directors to prohibit transactions
involving insolvent trading by the company. As per this section, a director has a duty to prevent
insolvent trading where he hold the position of director during the time a debt or loan is incurred
by the company and moreover, the company is either already insolvent during that time or it has
16 Nyberg, Daniel, and Christopher Wright. "Performative and political: Corporate constructions of climate change
risk." Organization 23.5 (2016): 617-638.
17 Corporations Act 2001 (Cth) s588G.
18 Corporations Act 2001 (Cth) s588G(1).

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become insolvent due to such debt or loan. Moreover reasonable grounds are there at the time to
suspect that the said company is already insolvent or has probability to become insolvent.
When the director cannot prevent the company from taking such loan or debt in the
situations mentioned above, the director is said to contravene section 588G provided he is well
aware that there are enough grounds to suspect the insolvency. In such case, as per section
588G(2)19 a civil penalty will be imposed on the director as per the said section in accordance to
section 1317E20 of the said Act. Moreover as per section 588G(3)21, the director will be liable for
committing an offence if he has dishonest intention behind such insolvent trading.
However, some defences are available to the directors under section 588H22 which they
can claim as the reason behind failure to prevent such insolvent trading. Such defences are that
the director was aware that the company was solvent when the debt was incurred or when the
debt incurred the director was not involved management due to sickness or other valid reasons or
he has already taken enough steps to prevent the company from incurring the debt. This can be
supported by Metropolitan Fire Systems Pty Ltd v Miller23.
Application:
As per the facts of the case, a listed public company of Australia named as Exotic Ltd is
also involved in operating a water –front resort. The company is operated and controlled by Joel
who is the managing director and Bill and Bibi who are the two non executive directors of the
company.
19 Corporations Act 2001 (Cth) s588G(2).
20 Corporations Act 2001 (Cth) s1317E.
21Corporations Act 2001 (Cth) s588G(3).
22 Corporations Act 2001 (Cth) s588H.
23 Metropolitan Fire Systems Pty Ltd v Miller (1997) 23 ACSR 699 at 711.

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A serious problem of algae blooming in the water front of the resort occurred and is
required to be treated son as the guests cannot swim or enjoy in it. The directors are required to
seek loan from Shark Finance Pty Ltd for getting treatment to solve the issue of algae bloom. In
the meeting, the directors agreed to take loan but they did not consider the reason behind such
bloom which is the climatic change actually. Finally as an effect of all these, the company turns
insolvent. Though the company was in financial distress, the directors did not consider it and
avail loan. This can be treated as breach of section in 588G. But the accountant in the meeting
ensured that if the plan suggested by the Pacific Algae Treatment Inc is considered, it will help to
attract more wealthy tourist that will help to eradicate its financial issues. This can act as a
defence as they have considered the assurance given by the company accountant. Moreover, Bill
can claim that he was unable to attend every meeting due to long distance. But this will not be
allowed as he did not take part in it willingly. Further, the directors must have taken advice from
other financial advisors. Moreover they have totally ignored the climatic change issue24. Hence
the defences cannot be availed by them. thus they are liable as per Metropolitan Fire Systems Pty
Ltd v Miller.25
Conclusion:
Bill along with other directors of the company are liable for taking the loans which in
turn the company insolvent and they cannot avail any defence to evade from such allegation and
liability.
24 Bremer, Josephine, and Martina K. Linnenluecke. "Determinants of the perceived importance of organisational
adaptation to climate change in the Australian energy industry." (2017) Australian Journal of Management 42.3:
502-521.
25 Metropolitan Fire Systems Pty Ltd v Miller (1997) 23 ACSR 699 at 711.

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Bibliography
Books and Journals:
Barker, Sarah, et al. "Climate change and the fiduciary duties of pension fund trustees–lessons
from the Australian law." (2016) Journal of Sustainable Finance & Investment 6.3: 211-244.
Bremer, Josephine, and Martina K. Linnenluecke. "Determinants of the perceived importance of
organisational adaptation to climate change in the Australian energy industry." (2017) Australian
Journal of Management 42.3: 502-521.
Linnenluecke, Martina K., Andrew Griffiths, and Peter J. Mumby. "Executives’ engagement
with climate science and perceived need for business adaptation to climate change." (2015)
Climatic change 131.2: 321-333.
Nyberg, Daniel, and Christopher Wright. "Performative and political: Corporate constructions of
climate change risk." Organization 23.5 (2016): 617-638.
Pielke, Roger A., Rezaul Mahmood, and Clive McAlpine. "Land’s complex role in climate
change." (2016) Phys. Today 69: 40-46.
Cases:
ASIC v Cassimatis (No 8) [2016] FCA 1023.
ASIC v Vines [2003] NSWSC 1095.
Australian Securities and Investments Commission v Healey [2011] FCA 717.
Australian Securities and Investments Commission v Macdonald (No 11) [2009] NSWSC 287.

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Australian Securities and Investments Commission v Rich (2009) 75 ACSR 1, 627 [7254].
Metropolitan Fire Systems Pty Ltd v Miller (1997) 23 ACSR 699 at 711.
Legislation:
Corporations Act 2001 (Cth).