BULAW5915 Corporate Law - Research Questions Assignment Solution

PART ONE

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. 

Question 1

A fiduciary duty exists where there is a relationship between two or more parties. In a fiduciary relationship, a party places their trust, confidence and reliance on the other and the other party has the duty to conduct themselves in a manner that benefits the party who places trust and confides in them. The creation of a fiduciary relationship can be either express or may be imposed by the law.Generally, fiduciary relationships give rise to fiduciary duties.

A company director has a duty under the provisions of Section 588GA of the Corporations Act 2001 to prevent insolvent trading.  Under the provisions of the foregoing section, a director of a company has the responsibility to ensure that the company does not incur debt if it is already insolvent at the time the debt is incurred and when the debt that is incurred leads to the company being involvement or gives rise to the reasonable event that the company will become insolvent as a result of that debt.The director that has the caution of always being conversant with the financial position of the company in order to prevent it from becoming insolvent.  An insolvent company is one which is unable to pay its debts or meet its obligations towards the creditors. The Australian Securities and Investment Commission further provides on the events that may indicate that a company could be insolvent in the Regulatory Gide 217 where creates the scenarios for the directors that may help them prevent insolvent trading.

Indeed, directors have a duty to prevent insolvent trading. However, questions arise as to whether the duty to prevent insolvent trading is fiduciary or not. The fiduciary duties owed by a director to the company entails acting with due diligence and utmost good faith for the best interests of the company. Further, the director has to act within their powers and avoid instances of conflict of interest in going about their duties. The duty to prevent insolvent trading aimed at ensuring that the best interests of the company are served. 

Directors are agents of the companies they server. They obtain authority in their capacities from the owners of the companies. It is thus expected of them to act with the best interests of their donors who are their shareholders. The elements of utmost good faith, acting within authority, avoiding conflicts of interests as well as due diligence are general duties of directors which are based on the fiduciary relationships. The agency relationship between directors and the company is the backbone from which the duty to prevent insolvent trading derives. The existence of an agency in the context of directors with regard to insolvent trading asserts that the duty is as a result of the fiduciary relationship.

Question 2

The Safe Harbour legislation was enacted in the year 2017 as component of the Insolvency Law Reform Act. The law seeks to bardirectors from being personally held liable for insolvent trading when they act in a manner that reasonably creates the potential for better outcomes. The objective of the safe harbour defenceis to ensure that directors of companies experiencing financial difficulties are able toendeavour to put them on track rather than prematurely surrendering them for insolvency or administration. The interests of the creditors are therefore protected and the directors are allowed the opportunity to be innovative and take reasonable risks so as to find solutions to companies that are struggling.