Case Study: Corporations Law - Director's Duties and Responsibilities

This case study examines two scenarios within the realm of Corporations Law, specifically focusing on the duties and liabilities of company directors. The first scenario involves ME Enterprises Pty Ltd, where directors Liam and Peta are assessed for potential breaches of the Corporations Act 2001, particularly concerning insolvent trading under section 588G. Peta's actions during a period of financial distress are scrutinized, while Liam's role as a non-executive director is considered. The second scenario involves CloudTech and its directors, Alexandra, James, and Simone. The case evaluates Alexandra's potential liabilities concerning contracts made by her separate company, Banger, and the misuse of CloudTech's client list. The analysis applies relevant sections of the Corporations Act, including those concerning director's duties of care, diligence, good faith, and the prohibition of misuse of position and information, to determine the legal responsibilities and potential penalties for each director.

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Contents
Question One...............................................................................................................................................2
Issues 1........................................................................................................................................................2
Law..........................................................................................................................................................2
Application..............................................................................................................................................2
Conclusion...............................................................................................................................................3
Issue 2.........................................................................................................................................................3
Law..........................................................................................................................................................3
Application..............................................................................................................................................3
Conclusion...............................................................................................................................................3
Solution 2....................................................................................................................................................4
Issue 1.........................................................................................................................................................4
Law..........................................................................................................................................................4
Application..............................................................................................................................................4
Conclusion...............................................................................................................................................4
Issue 2.........................................................................................................................................................4
Law..........................................................................................................................................................4
Application..............................................................................................................................................5
Conclusion...............................................................................................................................................5
Reference List.............................................................................................................................................6

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Question One
Issues 1
Are there any grounds for ASIC to bring civil or criminal actions against Liam and Peta?
Law
As per the requirements section 180 of the Corporation Act 2001 is not taken into consideration.
Section 9 defines company directors which includes de-facto, shadow and executive directors
(ASIC v Healey (2011). A person is director when he is either posted as director or is carrying the
responsibly of a director. The power to govern a company is granted to a director under section
198A of the Act. (Tomasic, et al, 2002)
Several statuary duties must be comply with by a director including a duty to prevent insolvent
trading. Section 588G of the Act deals with the prohibition on insolvent trading by the directors.
The duty to prevent insolvent trading is only imposed upon the director:
i. When the debt is incurred then such person is the company director;
ii. It is on the occurrence of debt that the company becomes or is likely to become
insolvent;
iii. The director is aware that because of the debt there are chances of the company to
become insolvent or is already insolvent (Woodgate v Davis (2002).
But, under section 588H there are few defenses that are available: (Baxt, 2005)
i. Reasonable grounds that the company will not become insolvent on the occurrence of
debt (Metropolitan Fire Systems Pty Limited v Miller (1997);
ii. The director relied on relevant information;
iii. The director was not part of the management when the debt is incurred;
iv. Reasonable steps are taken to prevent insolvent debt.
Section 588E (4) has raised a presumption that the company must be considered as insolvent
during the period when it is not able to keep the financial records of the company and as held in
Swan Services Pty Limited (in liquidation) [2016].
The law is now applied.
Application
ME Enterprises Pty Ltd is a company with Liam and Peta as its shareholders/directors.
Day to day activities are carried by Peta including marketing/growing the business.
Liam is the non executive director.
They both review the financial status quarterly based on balance sheet made by employees.
Peta make sure that the suppliers of the company are paid on time. But, in May 2017, she
released that suppliers are not paid. Employees are instructed to pay suppliers on priority basis.
In June 2017, a notice is received by the company from Australian Taxation Office for the
payment of taxes.

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No heed is given by Liam and pets on the notice of the office nor is any attempt made to alter the
companies working to reduce expenditures.
The balance sheet of 2017 shows assets < liabilities.
But when the events amid May June 2017 were carried out by Peta alone as Liam she was
suffering with cancer and undergoing treatment.
There is clear violation of insolvent trading under section 588G of the Act by Peta mainly
because:
i. Peta was carrying on business and is the director amid May –June 2017 and incurring
expenditure knowing that the company is not able to pay its current suppliers;
ii. Because of the incurrence of expenditure the liabilities > assets;
iii. Peta is aware that the actions might result in insolvent trading of the company.
Thus, Peta has violated section 588G of the Act and is held liable for insolvent trading.
Liam was not the director during May-June 2017 when the debt is incurred and thus seek defuse
under section 588H of the Act.
Conclusion
Peta is held liable for insolvent trading. But, Liam can rely on the defense under section 588H of
the Act.
Issue 2
If ASIC’s prosecutions team decides to pursue action against Liam and Peta, what penalties
could ASIC seek from the court?
Law
When there is violation of section 588G of the Act, then, the liabilities includes:
A civil liability, in the form of pecuniary penalty (up to $220,000); compensation to company
(1317H) or disqualification order (section 206C).
Criminal penalties can also be imposed for Fine of $340,000 or five years imprisonment, or both
if the acts are carried out with dishonest and reckless intention.
Application
Since the acts of Peta are carried out with recklessness thus criminal liabilities scan be imposed
of Fine of $340,000 or five years imprisonment. Civil liabilities can also be imposed up to
$220,000 and can be disqualified under section 206C of the Act.
Conclusion
Peta is liable for liabilities but Liam is not ashe was safe under section 588H of the Act.

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Solution 2
Issue 1
Can Alexandra be held liable for making contract with Gnosis and Banger?
Law
When a comoany is incorporated in law then it acquires the status of a separate legal entity. In
Salomon v A Salomon and Co Ltd [1897] separate legal entity principle signifies that the
company is distinct from its members and the acts which are carried out in the name of the
company are its own and not imposed on the members personally.
The officers only carry the acts on behalf of the company and the contracts that are made by the
officers are binding upon the company alone and the director’s cannot be held liable for the
same. (Latimer, 2012)
Application
CloudTech has three directors/shareholders, Alexandra, James and Simone. Alexandra wants to
bid in Gnosis which was rejected by James and Simone in February 2018 meeting.
Now, a new company is formed by Alexandra, Banger, which made a bid at Gnosis and the bid
was accepted. It is submitted that Banger is a separate legal entity in law as it an artificial legal
person. So the contract taken by Banger is in its own capacity and is not associated with
Alexandra.
Conclusion
Thus, Alexandra cannot be held liable for making contract with Gnosis as the same is by Banger
and not Alexandra?
Issue 2
Can Alexandra be held liable for using clients of the company?
Law
Ever company director must comply with few duties:
i. A director must always act with care and diligence as per section 180 (1) of the Act
(ASIC v Hellicar [2012].
ii. The acts of the director must be in good faith and for the proper purpose of the
company.
iii. No director must misuse the position and information of the company under section
182 and 183 of the Act;
iv. No director must take any transaction which results in conflicting his own interest
with the interest of the company and if the conflict exist then the interest of the
company must prevail (Aberdeen Railway Co-v- Blaikie Bros (1854).

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Application
Alexandra uses the client list of CludTech in April 2018 in order to bring benefit to his own
company Banger. Thus, Alexandra uses his position as a director in CloudTech and misuses the
information of the company in his own interest. Thus, there is breach of section 182 and 183.
The acts are not carried with carefulness and diligence nor in good faith, thus, there breach of
section 180 and section 181 of the Act.
Conclusion
Thus, Alexandra can be held for violation of his statutory duties.

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Reference List
Books/Articles/journal
Baxt, R. (2005) Duties and Responsibilities of Directors and Officers. AICD.
Latimer, P. (2012). Australian business law 2012. North Ryde, N.S.W: CCH Australia Limited.
Tomasic, et al. (2002) Corporations Law in Australia . Federation Press.
Case law
Aberdeen Railway Co-v- Blaikie Bros (1854) 1 Macq 461
ASIC v Hellicar [2012] HCA 17
ASIC v Healey (2011) FCA 717 at 166; 172.
Metropolitan Fire Systems Pty Limited v Miller (1997) 23 ACSR 699;
Salomon v A Salomon and Co Ltd [1897] AC 22;
Swan Services Pty Limited (in liquidation) [2016].
Woodgate v Davis (2002) 55 NSWLR 222.