BULAW5915 Corporate Law Assignment Help
1. Is the duty to prevent insolvent trading a fiduciary duty? Why or why not? You must give detailed reasons.
2. How does the safe harbour defence s588GA operate?
3. Who does it (s588GA) protect, and is this different to the business judgment rule s180 (2)? Give reasons.
4. Are there any restrictions on the operation of the s588GA defence? If so, what are they?
5. 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?
Listen to the podcast (or read the transcript) ‘The talented Mr Daly '
1. Did Mr Daly breach any directors' duties? If so, which ones and how?
2. Did any of the other directors breach their duties? If so, who, which duty and how?
3. Do you think the company was trading while insolvent? Give reasons.
4. 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.
5. Would the new ‘safe harbour' defence assist the directors? If yes, how? If no, why not?
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1. REASONS OF DUTY TO PREVENT INSOLVENT TRADING A FIDUCIARY DUTY:
The director of the company is a person who acts on behalf of the company. This is because the company cannot perform on its own and needs people to run its business. As per Section 588G of the Corporations Act there is a positive duty which the director have to perform so that he takes all the necessary steps and measures to prevent the company from trading in case of insolvency. There is a great responsibility of director as per the law and provisions contained in the Corporations Act (Rodgers Reidy, 2016). The obligations are laid down in the law and the director needs to comply by the same and in case the director fails to do so, his duty may come under scrutiny.
As per the Section 588G, the duty of the director requires him/her to prevent the company from incurring any debt in cases where the company is already insolvent or by incurring that particular debt in question, the company can become insolvent. For this, the director is require to have knowledge about the financial position of the company at all times. Merely reviewing the annual account will not make the director aware of the same. Therefore, the fact that be concluded is that it is the fiduciary duty of the director to prevent insolvent trading.
2. OPERATION OF SAFE HARBOUR DEFENCE s588GA:
A proposal paper was being released by the government in April 2016, wherein proposals were proposals were made for implementation of "safe harbour" for the directors with respect to their duty to prevent insolvent trading. According to the safe harbour defence as per section 588GA, it was being provided that if a director have taken all the reasonable steps so as to ensure that the outcomes of the activities being undertaken will reasonably lead to a better outcome then he will be considered as "safe harbour"(Brendan Pitman, 2019). However, this title will be available only to those directors that are honest and diligent.
The directors that will be considered as safe harbour will be those who are taking all the steps that are necessary for the prevention of any misconduct by the officers which can have negative effect on the company for repayment of its debt, necessary steps on the validity of the financial records are being carried, they are having proper information about the financial position of the company and they are continuously taking steps to ensure the improvement in the financial position of the company. The provisions contained within the sections for considering a director as safe harbour is not exhaustive and depends upon the actions taken by the director so as to improve the financial position of its company. The concept of "safe harbour" as per law relies upon on the test of reasonableness and assessment of all the possible outcomes. Therefore, it is clear that with the introduction of the "safe harbour" there has been development of a strong relationship of the director with that of the company.
3. PROTECTIONS AS PER PROVISIONS U/S 588GA AND ITS DIFFERENCE WITH THE BUSINESS JUDGEMENT RULE SECTION 180 (2):
As per the new section contained within the Corporations Act, section 588GA provides a "safe harbour" from claims of insolvent trading for directors wherein a director if suspects the company for becoming insolvent, starts to develop a course of action which will result in having a positive outcome for the company. The directors are required to test the various aspects wherein they can check the course of actions and its alternative to be undertaken when the company is in the position of becoming insolvent. The suggested steps as designed and proposed u/s588GA are although not exhaustive in nature but it covers all the major steps which has to be taken into consideration while using insolvency safe harbour. Some of them are checking the outstanding entitlements of the employees and ensuring the company will be in the position to pay them off as and when they are due, checking the company's tax liabilities, checking the outstanding dues of the employees and officers on account of misconduct, checking insurance and indemnity policies of the company, assessment with regard to better outcome before entering into debts, complying with the obligations in relation to the books of accounts, etc.
However, the Business Judgement Rule as contained in Section 180(2) provides the director to act with care, diligently and with being judgemental (Edward Griffith, 2017). Section 180(2) have laid down how the directors shall act with a degree of care and diligence. The major duty as contained within it is that is the director is required to carefully assess the financial statements of the company before making any debt decisions. It is clear that it is the duty of the director to monitor the affairs and policies of the company.
4. RESTRICTIONS ON THE OPEERATION OF THE SECTION 588GA DEFENCE:
There are restrictions on the operation of the section 588GA, which is contained in part b of the 1st provision wherein the "safe harbour" protection is limited to those debts which have been incurred by the company in relation with some provisions. This is made because as per the current regime without any restrictions, the directors are questioned on all the debts being incurred by the company in case of any breach being done by them. This makes it difficult on part of the director to safe guard them and prove that they should not be held liable for all the breaches and for the company becoming insolvent. One of the other provision contained in this is that, in cases where the insolvency occurred because of the company entering into the relevant arrangement then there also the director will not be held responsible.
The limitations on the safe harbour defence along with other restrictions on the extent of availability of the protection, it is being established that the directors will not be able to have their reliance on "safe harbour" in cases where the company fails to meet its obligations in relation to its employees and tax obligations (David Walter, 2017). This restriction is actually the manifestation of the condition which is fundamental in nature i.e. "safe harbour" wherein the directors should act honestly in the management of the company.
5. EFFECT OF CHANGES IN DIVISION 3 ON THE NUMBER OF VOLUNTARY INSOLVENCIES IN AUSTRALIA:
After the amendment made in the provisions that directed dealing with the insolvency of the company, there was a major effect on the organizations in Australia. The major result that came out as an outcome was that there was increase in the number of voluntary insolvencies in Australia as because directors complied with the defence rule of "safe harbour" wherein the directors in cases when found that the company is having a weak financial position of a debt taken by the company will not be paid owing the financial position of the company, the directors acted honestly and with due diligence the same was addressed by the directors to the regulators and they thus opted for voluntary insolvencies.
The safe harbour rule provides that if the director having knowledge of the financial position of the company is of the opinion that the company will fail to meet its financial obligation, then he/she can opt of voluntary insolvency. In such cases, the actions taken towards the directors were not strict. However, in cases where the company were made insolvent mandatorily because of the provisions of law, the directors were answerable and were required to give reasoning behind the fall of the company suddenly.
1. ANALYSIS OF DIRECTOR DUTIES BEING BREACHED BY MR DALY:
On analysis of the case, the fact that be assessed is that Mr Daly has definitely breached the director duty because of the actions being taken by him. It has resulted in a finance scandal of $8 billion. The duties breached by Mr Daly are discussed as below:
- Distribution of money: The money which was received by Mr Daly was utilised by him wrongly since it was used to pay off the personal liabilities of the director viz. compensation of divorce, wedding, bills of taxes, events, etc.
- Lending of money from company to the company itself: Mr Daly failed to perform his duty as because it was found that the company Linchpin Capital lent money amounting to $2 billion to itself.
- Borrowing money from investors: The director borrowed money from investors in cases where he was short of cash and therefore this fails the director in performing his duty with being bias free.
- Misleading Clients: The director provided information that were fake and the financials represented by him were misappropriate thereby misleading the clients.
- Violation of the Corporations Act: The director violated the provisions of the Corporations Act wherein the director is required to discharge his duties with utmost care, faith and due diligently.
- Misappropriation of Funds: The director misappropriated the funds of the company for his personal use and for the payment of the dues and outstanding of other companies in which he had interest.
- Tapping money of investor's: The director was also held responsible for tapping the money of the investors. The investor invested their money in good faith and in return the director Mr. Daly tapped their money.
2. ANALYSIS OF OTHER DIRECTORS BREACHING THEIR DUTY:
The other directors of the company Linchpin Capital are also to be held responsible for breaching their duty as director as per the Corporations Act 2001 as because in spite of the awareness of the fact within them that Mr. Peter Daly was making the funds of the company available for his personal use and also for the other companies, they did not acted as "safe harbour" and thereby failed to disclose these facts to the regulators. The director told about the breach of duty being done by Mr Daly only when there was investigation conducted by ASIC. The investigator of ASIC while investigations heard many weird excuses for breach of duty being done by the other directors of the company. The other two directors, other than Mr Daly breached their duty as director. The duties breached by them are discussed as follows:
- The duty to act in good faith and using the powers as directors for the benefit of the company was being breached,
- The duty of undue influence of other person was breached,
- The directors failed to exercise reasonable care, skill and diligence,
- The position where the director is supposed to avoid any conflict was required to be created in which also the other directors failed,
- The directors entered into transactions where they had personal interest is again breach of director duty,
- The directors made unauthorised use of the property of the company.
All the above duties were breached by the directors by keeping quiet on the actions taken by Mr Daly, which was intentionally done to manipulate the funds of the investors.
3. COMPANY TRADING WHILE INSOLVENT:
The company in which Mr Daly and other two person were the directors the company continued to trade even when it was insolvent. This resulted in the company failing to comply with the provisions contained within section 588GA of the Corporations Act, 2001. The company is held to be trading while it was being insolvent because of the following reasons:
- The company continued to accept debts even when there was position where the fact was clear that the company will not be able to repay them.
- The financial position of the company was not assessed while accepting any debts
- The money of the investor was not being utilised at the right place and was being used for personal purposes of the directors
- There was absence of due diligence and care which should have been present in the directors so as to safeguard the company from being insolvent.
- The company's director took cash from investor in cases where they felt short of capital.
- There was mismanagement of funds along with misleading investors which ultimately resulted in the company being insolvent.
- The company failed to comply with the provisions as contained in the various sections of the Corporations Act, 2001.
4. DEFENCES AVAILABLE TO THE DIRECTORS IN CASE WHERE THE COMPANY IS TRADING WHILE BEING INSOLVENT:
In cases, where the directors of the company are facing insolvency should ensure treatment of the creditors as equal and should get into taking professional advice which will lower down their risk of charge of wrongful trading. However, in this case there is no defence being available to the directors of the company. This is because the directors here are found and have accepted the fact that they were intentionally involved in the "wrongful trading" of the company. The director had full knowledge of what was going within the company and they failed to take any step of avoiding the administration step for the minimisation of the potential loss that impacted the creditors of the company. The fact that the director had all the prospects of knowledge that the company will go into insolvent liquidation since the funds of the company were not utilised appropriately.
The two questions are required to be assessed before any defence option is made available to the directors are discussed as below:
- Function of the director: The directors failed to discharge their role and duties as the director of the company since all the duties of the directors were being breached by the directors to take advantage from the company formed on a personal level.
- The skill and experience of the director: On conducting a subjective test, the fact that the directors failed to exercise their skill and experience as a director can be assessed.
Therefore, in this case, the company is trading while insolvent. However, there are no defences being available to the director since the director failed to discharge their duties.
5. "SAFE HARBOUR" DEFENCE ASSISTING DIRECTORS:
As per the "Safe Harbour" Defence, the directors are protected when they conducted safe harbour on the company which is going insolvent. Safe harbour as discussed is basically the directors taking steps to assure that they are acting honestly and diligently to protect the company from insolvency by keeping the financial position of the company readily available. In case of the company Linchpin Capital, the directors of the company failed to comply with the provisions of safe harbour defence.
The "safe harbour" defence would have been available to the other two director other than Mr Daly, had they taken steps and measures to highlight the wrong actions being taken by Mr Daly. However, the other two directors continued to help him so that the advantage earned by him can be passed down to them.
Therefore, the fact that can be assessed is that in this case, the directors cannot gain benefit out of the defence actions being provided in the Corporations Act, since all the directors failed to discharge their duties and also did not acted with due care and diligence.
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