Corporate Law Assignment Outlining The Directors Duties
Part A: Research and consider the reasons for the introduction of the safe harbour defence in s588GA and the effect of the 2018 amendments to Division 3 - Director’s duty to prevent insolvent trading
Answer the following questions
- Is the duty to prevent insolvent trading a fiduciary duty? Why or why not? You must give detailed reason
- How does the safe harbour defence s588GA operate?
- Who does it (s588GA) protect, and is this different to the business judgment rule s180 (2)? Give reasons
- Are there any restrictions on the operation of the s588GA defence? If so, what are they?
- Do you think the changes to Division 3 will have an effect on the number of voluntary insolvencies in Australia in the future? Why or why not?
Part B:Listen to the podcast (or read the transcript) ‘The talented Mr Daly ’ which can be found at https://www.abc.net.au/radionational/programs/backgroundbriefing/updated-the-talented-mr daly/10282810
Answer the following questions.
- Did Mr Daly breach any directors’ duties? If so, which ones and how?
- Did any of the other directors breach their duties? If so, who, which duty and how?
- Do you think the company was trading while insolvent? Give reasons
- If the company was trading while insolvent – are there any defences available to Mr Daly and/or other directors? If so, what are they? Give reasons
- Would the new ‘safe harbour’ defence assist the directors? If yes, how? If no, why not?
1. The corporate Law in Australia is evolving and it changes to give new roles and duties to the director of a company. A director company has duty under section 588G of the Corporations Act to stop a company from trading if it has filed for insolvency. The role of director under the legislation of Australia is to make sure that he enjoys the privileges and the responsibilities, being totally aware of the obligations towards the company. The legislation mandates that the director has a financial duty e to make sure that the company does not trade if it is insolvent. The reason why the director has a fiduciary duty to prevent a company from insolvent trading is because he shall always be aware of the financial position of the company and the fact that there shall be serious consequences if the director fails to fulfill his duty1 . Fiduciary duty of a director entails him to keep the best interest of the company ahead of them. Insider trading under Australian law is prohibited because a company cannot create in securities while they are possessing non Public information. The most important element of duty to prevent insolvent trading by a director under 588G of the Corporations Act is that he should be aware that the company has increased that and he shall not allow the company to indulge in insolvent trading. The exception to the above mentioned section is provided by 588H, when is the director can prove that management and was taking reasonable steps to prevent any debt from occurring, he shall not be held liable 2.
2. Safe harbor for directors
The safe harbour provision was introduced by the Corporations Act 2001 by the amendment which created a defence against insolvent trading. The difference was created for directors which were for the purpose of encouraging the directors to help them restructure the functioning of the company who might be at the risk of insolvent trading. The purpose was the director’s could save the company and create a turnaround for them. The safe harbour defence created a shield for the directors under section 558GA(1) which states that the duty which was created by 588G(2) shall not apply to director as well as a debt if it can be proved that the director had developed more courses of action which would benefit the company and result in an outcome that would help the company get back on its feet. The immediate appointment of any liquidator for any appointment open administrator when the director finds that the company maybe come insolvent can help him stay out of the liability3 . The director has to act in such a way that will lead to a significant outcome will be beneficial for the director as well as the company. the onus is on the director to prove that he has worked towards substantially improving the financial position of the company. The safe harbour defence will only be applicable to a director if he can show that he has fulfilled the duties of a director and also completed with the legal obligations. The failure to comply with the legal exceptions under section 588GA(6) shall be used by the court only when they are satisfied the director could not act as per his duties due to exceptional circumstances4 .
This provision Act as an exception that helps in excluding the liability of a director for insider trading which has been mentioned under section 588G(2) of the corporations act. The safe harbour provision is mentioned under section 588GA which helps the director’s form a defence to prove that they are not liable for indulging in insider trading. The purpose of this section shall we to help the directory consider all the decisions he had taken for betterment of the company. The law of Australia and shows that insolvent trading be an offence and the directors will be personally liable for the debt that occurs when the company is insolvent5. This provision is in the best interest of the director to help him take measures and steps to make sure that the safe harbour protection applies at the earliest opportunity. The directors have to be convinced under the safe harbour protections that they are not creating any financial district for the company and unfair situation for the creditors. Australian governance on corporate laws has changed with the advent of the advent. As per section 180(1) of the corporations act, a director has a duty of care towards the company6 . The director has to exercise the power as well as discharge his duties in the best interest of the company. Section 180 the corporations act talks about fiduciary relationships and the duty of a director to discharge care and diligence for any reasonable person to exercise7 . The director is also not supposed to take any unfair advantage of the position that he is in8.
4. The section talks about the civil penalties that would arise if a director does not abide by his duties. The director has to make the judgement in good faith and for a proper purpose. The difference between the provisions of these two sections is the difference that arises in cases a company indulges in solvent trading. Only restriction for a director under section 588GA stage show that he had taken all the precaution that was necessary to make sure that the company was back on its track and hard bounced back. The director has to show that he has taken practice steps to control the company and without any unnecessary delay.
5. The solution for the constructive approach in solving corporate insolvency was to utilise practical and possible measures. The measure that was employed by most companies was to employ a liquidator when the company has filed for insolvency. The scene has changed with the introduction of the division9 . It is believed that this will create an impact on the number of voluntary insolvency because it has found measures to create considerable advantage to the company10 . The voluntary administration that was used for creating insolvency measures became a part of the legislative provision. The constructive approach will put a stop to the companies intending to enter into insolvent trading. Division III talks about the director's duty to prevent insolvent trading. Reason why it will create a better opportunity for the insolvent companies is because the director has been given duties to act as per the legislation and protect the company11 . The director is obligated to prevent any company from insolvent trading. Only when there are penalties to prevent a director from insolvent trading, will the rights of the creditors will be safeguarded. The best interest of the company should be kept by the director I am making sure that employs a liquidator who will utilise all the administrative procedure to help the company. The reason why director is obligated to give the best interest of the company is because he is in a fiduciary relationship. The director is duty bound to act in good faith and that is primarily the reason why he will stop a company from insolvent trading. The principles of safe harbor are intended to create a shield, but the Australian Securities and Investment Commission shall not allow loans to be sanctioned.
1. Peter Daly who is the director of a multinational company had borrowed money from clients to resolve his personal difficulties and to settle the divorce of his office colleague. He had that money from the clients for his own personal gain and that is the reason why he is being investigated by the Australian securities and investment Commission. The commission is denying loan to the director for the wedding of his daughter. When asked as to the reason why he took the money from his clients he believed that the clients would be comfortable with his decision to use that money for his personal gain. He had also searched people all across the globe to be sympathetic towards him because he was experiencing a personal turmoil. It has been alleged that the company does not function as per the provisions of the legislation and it also has miss managed funds. The consequences of his action have been extreme because he has reached the Corporations Act.
The primary element of director’s duty under section 180 of the Corporations Act is to act in good faith and in the best interest of the company12 . His duty as a director is also not to advances on personal goals but to keep in mind the interest of the clients and the people involved with the business. As per the section of director's duty under the Australian legislation, it is mandatory that the director exercises his powers and discharges his duty with care and due diligence. The director has to make the business judgement for the best interest of the company and keeping in mind the brand image. In this particular case, the director has breach his duty as per the legislative provisions of Australia because he did not make the judgement in good faith. The director did not inform the clients about the fact that he shall be using the money for his personal gain. He did not discharge his duty in good faith and in the best interest of the corporation. He also used the money of the client for his own personal gain and not for the company. These factors make him liable for breach of director’s duties under the corporations act 2001. He used the money for his private business interest and also borrowed all the money from investors when he was running short of cash. These are against the primary and essential principles of good faith of a director.
2. Along with Peter Daly, there was another director who you can ask for another payment. A separate loan for $30,000 was again made to another director of the fund who was made to cover a cash flow hurdle in relation to a property which was related to the ex wife of the director. The purpose of this scheme was too like to the regulator and also associated with the undesirables to be able to borrow funds. The fact that the directors used the money for their personal gain was a reason for the Australian securities and investment Commission to deny the loan. No director Sir in the world in any kind of behaviour that has the potential of misleading the investors for their own purpose. The directive preserve take the compliance and seriously and he had broken the provisions of the corporations act. Reason why he is liable is because he did not take preliminary steps to give the interest of the clients ahead of him. He has reached company culture and has also responsible for a multi-million dollar investment scandal. The money of the clients was used for the growth of the directors growing business. Directors 1 and 2 have used the money for their personal purpose that is the reason why it is believed that they have reached the director’s duties.
3. In the interview, Paul Green accepts that there were concerns about the solvency of the fund because the money of the investors were in trouble. By weeding of few emails, it came to the knowledge that the financial position of the fund was not very good and that the company was in need of more cash. The director was aware the company did not have enough money to even pay a tax bill. The company did not receive any cash incomes and there only receiving investment funds which made it look like a ponzi scheme. The company was trading in solvent because it did not have the fund and was not being able to pay to the creditors. The company was trading violence solvent because we had in codon laws and from the email conversations it was clear that they were running on debt and did not have the money to pay to the potential stakeholders. The cash flow problem was the personal problem of the director but he chose to take the money of the clans to save himself and get the fund redeemed. The company was also looking for money to be sent to them because they did not have the finance. The fact that the money of the investors was safe is a way of understanding that he paid the loan with the money that he got from the clients.
4. As per section 588GA, where are defences available to a director if he is able of showing that he had the best interest of the company even when it was indulging in insolvent trading. As per the safe harbour principle, if the director can show that he has taken necessary steps to help the company come out of the insolvency, he shall not be held liable for breach of the corporations act. The famous of the safe harbour principles is to make sure that the director has acted with care and diligence. It is also important to make sure the director attempted to restructure the company when there was a risk of insolvent trading and did not place the company into you are voluntary administration. In this present case, for Mr. Dally and other directors, it was important to defend himself by stating that they have taken all the necessary precaution to help the company when it was struggling. Directors will have to avoid insolvent trading as per the exception to excuse themselves from any civil liabilities. The director in this case is Peter Daly and he has used the money of his clients for his personal gain. To prove that he is innocent, he has to show that he had the best interest of the company and did not use the money of the clients for his personal gain.
5. The safe harbour defence is used for the purpose of allowing the directors to continue insolvent trading and prevent themselves from civil liabilities why showing that we have used up all measures to prevent the company. The whole purpose of the safe harbour legislation tips to improve insolvency laws and prevent the stakeholders from increasing loss. For the safe harbour principles apply in the present case, the director has to show that he had employed a liquidator or an administrator for the proper functioning of the company and saving it from suffering losses. The director did not place a duty of care to prevent the company from encouraging for the loss even though he was aware that the company is insolvent. The director will be held liable if it does not carry the proper intention of protecting the company. In this case, the director had the intention to defraud the clients even though he was very well aware that the company was insolvent and that his fraudulent activity would personally hamper the rights of the creditors. For the safe harbour principle to apply, it is important to show that the director acted in good faith and in the best interest of the company. The principle of safe harbour will not apply in this case because the director was using the money of the clients for his own personal gain.
1. Omar, Paul J., ed. Directors' duties and liabilities. Routledge, 2018.
2. David, Bilchitz, and Jonas Laura Ausserladscheider. "Proportionality, Fundamental Rights and the Duties of Directors." (2016).
3. Oehmichen, Jana, et al. "When Elites Forget Their Duties: The Double?Edged Sword of Prestigious Directors on Boards." Journal of Management Studies 54.7 (2017): 1050-1078.
4. Huebner, Marshall S., and Darren S. Klein. "The Fiduciary Duties of Directors of Troubled Companies." AM. BANKR. INST. J. 34 (2015): 18-18.
5. Padova, Yann. "The Safe Harbour is invalid: what tools remain for data transfers and what comes next?." International Data Privacy Law 6.2 (2016): 139-161.
6. Corporations Act, 2001, S 181(1)
7. Katuli?, Tihomir, and Goran Vojkovi?. "From safe harbour to European data protection reform." 2016 39th International Convention on Information and Communication Technology, Electronics and Microelectronics (MIPRO). IEEE, 2016.
8. ASIC v Narain  FCAFC 120
9.  NSWSC 1052).
10. Bilchitz, David, and Laura Ausserladscheider Jonas. "Proportionality, Fundamental Rights and the Duties of Directors." Oxford Journal of Legal Studies 36.4 (2016): 828-854.
11. Hill, Jennifer G., and Matthew Conaglen. "Directors’ Duties and Legal Safe Harbours: A Comparative Analysis." (2018).
12. Corporations Act, 2001, S 181(1)