Commercial and Corporation Law: Kinsela v Russell Kinsela Pty Ltd Case

This case study analyzes the landmark case of Kinsela v. Russell Kinsela Pty Ltd (1986), focusing on the breach of directors' duties under the Corporations Act 2001. The case involves a funeral business where the directors, who were also shareholders, leased company premises to themselves at an undervalued price when the company was insolvent. The analysis examines the contravention of sections 180 (duty of care and diligence), 181 (duty to act in good faith), and 588G (duty not to incur debt when insolvent) of the Corporations Act. The court's decision, which prioritized the interests of creditors over those of shareholders during insolvency, is discussed, highlighting the shift in directors' responsibilities. The case underscores the importance of directors acting in the best interests of the company, particularly when insolvency looms, and the limitations on self-dealing when it prejudices creditors. The judgment emphasizes that during liquidation, the assets effectively belong to creditors, not shareholders, and directors cannot approve actions detrimental to creditors, even with shareholder consent.

[Commercial and corporation law]
Analysis of the case of Kinsela v. Russell Kinsela Pty Ltd (in liq) (1986)
2017
HOLMES INSTITUTE
(Student Details: )

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Introduction
Corporation Act, 2001 is an act of commonwealth which applies over the working of the
companies in the nation and it presents different provisions which are applicable to the different
stages of the lifecycle of a company (Gibson and Fraser, 2014). Amongst its different provisions
are the duties of the directors and officers of the company, which require them to work in the
best interest of the company, to use their position and the information of the company in a
diligent manner and even to protect the company from not trading in insolvent conditions,
amongst the various other statutory duties (Abbott, Pendlebury and Wardman, 2007). Where the
officer of the company, or its director, fails in fulfilling these obligations, the relevant person is
made liable for such contravention, whereby they are held liable in a criminal or civil manner,
depending upon the section and magnitude of contravention (Latimer, 2012).
One of such cases in which the duty of the directors was breached was the matter of Kinsela v
Russell Kinsela Pty Ltd (in liq) (1986) 4 NSWLR 722, whereby the court denied the directors to
approve the conduct of the directors by being shareholders themselves, as the result of it was
detrimental for the company creditors (Cassidy, 2006). This discussion has been focused on this
case and the manner in which the duties in this case were contravened.
Factual Background
In the case of Kinsela v Russell Kinsela Pty Ltd, the Kinsela family was carrying on a funeral
business, and they were both the directors and the shareholders in different companies. The
funeral business was being carried out through a company, which held the insurance for covering
the costs of the funeral services. This insurance was provided by the company against the cost of
the funeral of its clients. They obtained a small value as payment and in return, they were
provided with free funeral. As they continued to suffer high losses, the liabilities for the
company were raised (Opie, 2017).
In order to protect the interests of the creditors in the nation, the Funeral Fund Act, 1979 was
passed. And with the advent of this statute, the Kinsela family became concerned about their
business being affected in an adverse manner as a result of the precarious financial position of

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their business and the new statute being related to insurance. After this, a lease was signed by the
family company, with the husband and the wife, who were also the shareholders and directors of
this family company, for renting out the business premises at a price which was significantly less
than the rate of the market. And this took place at such point of time when it was very clear that
the company was insolvent. Once the company was put into liquidation, this particular transfer of
lease was challenged by the liquidators based on the contention that there had been a
contravention of the fiduciary duties as the directors failed n considering the interests of the
creditors when they were transferring the lease to themselves at a lower value (Opie, 2017).
Duties or Responsibilities Breached
As has been stated in the introductory segment of this discussion, the directors of the company
have certain duties which need to be fulfilled due to the applicability of the provisions of the
Corporations Act, 2001 (Baxt, 2007). In this regard, the three key duties which were contravened
in the case of Kinsela v Russell Kinsela Pty Ltd are covered under section 180, 181 and 588G.
Before understanding the manner in which they were contravened, there is a need to understand
what these provisions present.
Section 180 of the Corporations Act provides the duty on the directors and the officers of the
company to act in a careful and in a diligent manner and this section attracts civil obligations. As
per this section, the directors are required to show care and diligence when they use their powers
and discharge their duties, in such a manner, as a prudent person would undertake in case they
held the same position as that was held by the officer or director in question, provided such
prudent person had the same responsibilities and was faced with same situation (WIPO, 2015).
However, a defence is provided under subsection 2 of this section, whereby the directors making
a business judgement, with good faith and proper purpose, and where they do not have a material
personal interest in the matter in question, and have also informed themselves regarding the
judgement being made and make it rationally, then the duty under subsection 1 of this section is
not taken to be contravened (Federal Register of Legislation, 2017).
Under section 181 of this act, the civil obligation has been placed regarding the duty of acting for
proper purpose, in good faith and also in the best interest of the company, while using the powers
and discharging the duties (Paolini, 2014). The contravention of this and section 180 attracts civil

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penalties pursuant to section 1317E whereby the court has the power of making a declaration of
contravention. And after this is done, the ASIC gets the power of applying for disqualification of
directors as per section 206C or can seek pecuniary penalties based on section 1317G (ICNL,
2017).
Section 588G also imposes a duty on the directors of the company as per which the directors are
not to incur any debt when the company is insolvent, or where it is very clear that by undertaking
the debt, the company would become insolvent and there was reasonable grounds to suspect the
same. A contravention of this section attracts both civil and criminal liabilities. The civil
liabilities are present for breach of subsection 1 and for breach of subsection 2, results in
criminal liabilities being applied. The provisions of both the subsections are almost same, save
for the element of dishonesty in the latter subsection (Austlii, 2017).
In the case of Kinsela v Russell Kinsela Pty Ltd, these three duties were clearly breached. Section
180 was contravened in this case as the directors of the company, failed to show care and
diligence in their using their powers as they continued to incur debts for the company. Further,
once the legislation was passed, they undertook the lease in undervalued prices, which resulted in
the revenues of the company being diminished, when it was already in a debt ridden situation.
They failed to maintain a balance between the interests of the company and their personal
interests, whereby they contravened section 181 as due to their actions a detriment was caused to
the company, whereby it continued to suffer losses and ultimately went into liquidation (Swarb,
2016). The business judgment rule under section 180(2) would also not save the directors as they
had material personal interest in the lease which was undertaken at a lower price. Hence, these
two sections were breached, resulting in civil penalties being applicable upon the directors.
There was a very clear breach of section 588G in this case as the actions of the directors were
such that they continued to incur debts upon the company even when the position of the
company was not good. Further, the undervalued lease taken in their own name, at such time
when the company was insolvent was a breach of this duty. As a director, it was their
responsibility to look after the assets of the company and transfer the money which was due to
the creditors. Instead, they dishonestly took the lease to benefit themselves, thus breaching duty
under section 588G, and thus attracting civil and criminal element.

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Analysis of the Decision of the Court
In this case, the court held that when a company is solvent, the proprietary interest of the
shareholders give them the power as a general body which is to be deemed as a company when
the question related to the duties of director is raised (Lowry, 2016). However, when a company
is insolvent, there is an intrusion of the interests of the creditors. And this makes them entitled in
a prospective manner, as a result of the liquidation, for displacing the powers of the directors and
the shareholders in the matter of dealing with the assets of the company (Redmond, 2013).
Practically, the assets of the company are not the assets of the company or that of the
shareholders. And so, the creditors have the entitlement of consideration, in case the company is
nearly insolvent or is insolvent, or where the solvency is doubtful or in case the payment has
been contemplated, or there is a presence of any such course of action which would result in the
solvency of the company being put in jeopardy. Hence, the courts opined that the duty of the
director is raised when the company s insolvent, particularly due to the money of the creditors
being put at risk, in contrast to the proprietary interest of the shareholders (Campbell, 2007).
In this case, it was very clear that the creditors were prejudiced and this was in a direct manner.
Further, the result of the lease was calculated as the purpose of it was to put the assets of the
company beyond the reach of the creditors of the company. By undertaking the lease, the
directors attempted to avoid the property being sold out to set off the claims of the liquidators
due to the looming liquidation. Even though in this case all the shareholders had agreed to this
transaction, but there has to be a limit imposed on acting in an improper manner. In order to give
the verdict in this case, the judges relied on the analysis of Cooke J given under the case of
Nicholson v Permakraft (NZ) Ltd [1985] 1 NZLR 242 (CA). In the quoted case, the directors of
the manufacturing company were facing liquidity issues and adopted a reconstruction scheme
which was prejudicial for the creditors of the company. The directors relied upon the defence
that the informed consent of all the shareholders was taken to the reconstruction, when the
liquidator brought a case to set aside a transaction. The court had, after considering a lot of
points, stated that the duty of director in terms of insolvency was extended to not being
prejudicial towards the creditors and that the shareholders did not have the power of absolving
the directors of the company from such breach (CCH Australia Limited, 2017).

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After taking all these things into consideration, the court stated that the directors had indeed
acted in a manner where their director duties were contravened and they, themselves being the
shareholders, could not approve their own conduct, particularly because the same was
detrimental for the creditors of the company. This was due to the fact that when the company
approaches the process of liquidation, the assets of the company become the assets of the
creditors in a practical sense and they do not remain as the assets of the shareholders of the
company, even when the management of the company is in the hands of the directors (Redmond,
2013).
Conclusion
In the proceeding parts, an analysis was conducted on the case of Kinsela v Russell Kinsela Pty
Ltd, which revolves around the breach of the duties of directors for undertaking a lease whereby
the property of the company was given on lease to the directors of the company, at substantially
lower prices than the ones present in the market. This was done when the company was already
insolvent and with the purpose of reserving the property for the directors themselves, instead of
letting the same being used for the purpose of discharging the debts of the creditors at the time of
liquidation.
The case remains significant to date, as this case recognizes the approach of the company
towards insolvency, where the duties of the directors are changed from being owed to the
shareholders, to being owed to the creditors. And this case is also significant as it presents the
fiduciary duty of the directors to take into consideration, the interests of the creditors during the
time of insolvency, which cannot be removed by the shareholders, particularly when the situation
is commonly held.

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References
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Austlii. (2017) Corporations Act 2001. [Online] Austlii. Available from:
http://www6.austlii.edu.au/cgi-bin/viewdb/au/legis/cth/consol_act/ca2001172/ definitions
[Accessed on: 14/09/17]
Baxt, R. (2007) Duties and Responsibilities of Directors and Officers. 19th ed. Sydney, NSW:
The Australian Institute of Company Directors.
Campbell, C. (2007) International Liability of Corporate Directors. North Carolina: Lulu
Publishing Services.
Cassidy, J. (2006) Concise Corporations Law. 5th ed. NSW: The Federation Press.
CCH Australia Limited. (2017) 1986 Cases. [Online] CCH Australia Limited. Available from:
http://www.iknow.cch.com.au/document/atagUio386725sl10541569/kinsela-anor-v-russell-
kinsela-pty-ltd-in-liq [Accessed on: 14/09/17]
Federal Register of Legislation. (2017) Corporations Act 2001. [Online] Federal Register of
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Gibson, A., and Fraser, D. (2014) Business Law 2014. 8th ed. Melbourne, Pearson Education
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Limited.

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Paolini, A. (2014) Research Handbook on Directors Duties. Northampton, MA: Edward Elgar.
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