Legal Advice: Corporate Law Case Study - ASIC & Company Directors

This case study offers a legal analysis of two distinct scenarios. The first involves ME Enterprises Pty Ltd, which faced financial difficulties and was investigated by ASIC. The analysis focuses on the responsibilities of directors, particularly concerning insolvency, breach of contract, and potential liabilities. It differentiates between executive and non-executive directors, examining the actions and consequences for each. The second scenario involves a conflict of interest between Cloud-Tech Pty Ltd and a director who enters into a contract with another company, potentially stealing clients. The analysis delves into the Corporations Act 2001, highlighting directors' duties, including acting in good faith and avoiding conflicts of interest. The case study concludes with recommendations for legal actions and penalties, emphasizing the importance of ethical conduct and adherence to corporate law.

Legal Advice 1
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Legal Advice 2
Question 1
Part (A)
Legal advice to ASIC regarding ME Enterprises Pty Ltd
Issue
M.E. Enterprises Pty Ltd a registered company, after investigations by ASIC and
complains by supplies was found to be in liquidity problems. The company had liabilities that
exceeded its assets. This was evident in two instances where in the May 2017 ME Enterprises
Pty Ltd faced financial challenges in paying its suppliers. This was also repeated in June of 2017
when the Australian Taxation Office demanded payment of company taxes.
During this period one of the directors Liam a non-executive director had been diagnosed
with cancer and was unaware of the non-payments in May and June of 2017 to both the suppliers
and the Australian Taxation Office. The other director Peta is the one who is involved in the day
to day running of the business. The payments in the organization had been delegated to
employees who ensured that creditors are paid on time.
Rule
According to the Corporation Act 2001 a company is defined as a separate legal entity
with a distinct legal existence. This existence is separate from its directors and employees. A
company also has the capacity of an individual like to enter into contracts, own assets, sue and be
sued.

Legal Advice 3
Under certain circumstances directors of the company are personally liable. Some of these
circumstances include the following.
Areas suffered when a business becomes broke
One of the most important duties of a director in an organization is ensuring that the
business does not engage in transactions when it’s insolvent. A business is declared insolvent
when it’s unable to pay its debts on time. This is evident when creditors and legal authorities
start demanding to take action. In this particular case the directors are liable.
Losses incurred due to directors negligence
Directors who are responsible for the day to day running of the business are held
responsible if losses occur due to their negligence. This can be due to actions of commission or
omissio. For instance, entering into illegal contracts or falling to report insolvency to
shareholders and relevant authorities.
Regulatory inaction towards directors
This mostly applies in instances, where directors are directly liable if the fail honoring
laws being administered by other agencies like the Australian Taxation Office (Tomasic, R.,
2016). Directors have a legal obligation to ensure PAYG (Pay As You Go) is paid.
Analysis
In this particular case from the issues and the rule, there is a case of negligence and
breach of contract by one of the directors Peta who is involved in the day to day running of the
business. She is found liable for not taking adequate action as evidenced by Lord Hardwicke in
the case of Charitable v Sutton. He said a director may be guilty of acts of omission or

Legal Advice 4
commission. He noted that by a director accepting directorship he or she should take due
diligence in executing his or her mandate.
Conclusion
There was evidence of Peta failing to perform her duties diligently by preventing the
business from being insolvent, hence accuring debts to creditors and also failing to honor the
company’s tax obligations to Australian Taxation Office. The ASIC should bring civil action
against Peta, the director who was involved in the day to day operations of the company. Liam
should not be affected with either civil or criminal action as he is a non-executive director and
was undergoing treatment during the May –June 2017.
Part (B)
Penalties ASIC would press on Peta and Laim
ASIC would not press any legal charges and penalties to Liam as he was a non-executive director
during the period of the breach of contract. On the other hand Peta was actively involved in the
day to day operations of the company. According to the case of Charitable v Sutton, he should
have taken due diligence to ensure the business wasn’t insolvent and was able to pay its taxes. In
this regard the following penalties will be pressed on Liam.
 Banned from managing any company
 Obliged to personally pay the taxes and the creditors
 Penalty of a maximum $ 200,000 or five years imprisonment or both.
Question 2
Part (A)

Legal Advice 5
Conflict of interest contract between Gnosis Records and Banger
Issue
Cloud-Tech Pty Ltd is limited company with three shareholders, Alexandra, James and
Simone who are also directors of the company. Alexandra enters into a contract with another
company Gnosis Records against the other director’s consent using a different company Banger
Pty Ltd. She secretly steals Cloud-Tech clients, contacts them, but they decline her offer making
the other two directors very angry.
Rule
This is a criminal case because Alexandra deliberately stole from her fellow shareholders.
According to the Corporations Act 2001 directors can be held personally liable if they breach the
company’s contract. This can be outlined in the following key responsibilities of directors.
 To act in good faith and to the best interest of the company.
 Directors are advised to avoid their personal interests from interfering with the company.
Analysis
In reference to the Perry’s Case e of Re Montrotier Asphalte Company directors are
advised from not engaging in businesses that are in conflict with their companies. In this
particular case Cloud-Tech should take criminal action towards Alexandra for personally
entering into another legal contract behind Cloud-Tech back disguised as Banger Pty Ltd. Cloud-
Tech should seek for maximum penalty against Alexandra for not acting in good faith. Her
actions could have also crippled Cloud-Tech making it insolvent.

Legal Advice 6
Question 2
Part (B)
Alexandra’s use of Cloud-Tech’s client list
According to the Corporation Act 2001, Cloud-Tech should seek criminal charges against
Alexandra for first stealing and contacting Cloud-Tech clients behind their back. This will ensure
that the contacted clients gain their confidence back to the company. Alexander did act in good
faith and also didn’t have the company’s best interest with her actions. If her actions could have
succeeded Cloud-Tech could have been declared bankrupt. Alexandra’s actions were criminal
and breached on the contract they had agreed as directors.