BULAW5915 Corporate Law Assignment Help
Assignment Help on BULAW5915 | Report
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.
1. Is the duty to prevent insolvent trading a fiduciary duty? Why or why not? You must give detailed reasons (10 marks)
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 ensures is aimed at ensuring that the best interests of the company are served. Acting with utmost good faith and exercising due diligence to protect the company from incurring more debts that could lead it to insolvency or when it is insolvent is a fiduciary duty that the directors have.
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.
2. How does the safe harbour defence s588GA operate? (10 marks)
The Safe Harbour legislation was enacted in the year 2017 as component of the Insolvency Law Reform Act. The law seeks to bar directors 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 defence was is to ensure that directors of companies experiencing financial difficulties are able to endeavour 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.
The concept of piercing the corporate veil under Australian law holds directors liable for their actions that contravene their duties to the company and the public at large. Section 588GA of the Companies Act 2001 provides for the safe harbour defence. The defence comes to the rescue of directors when under two circumstances. The firsts instance is when at the time of reasonably suspecting that the company is insolvent or is on the verge of insolvency, the director develops a course or courses of action that are aimed at achieving better incomes than the company going into liquidation or under administration. Better outcomes entail results that would be more appealing to the creditors and the company which would otherwise not be the case when the company goes into liquidation or under administration. The second instance is when the course of action incurred directly or indirectly during the period that starts and ends at the time of the following:
• If at the end of reasonable period after determination of the course of action, the director does not begin to take the course of action.
• when the director ceases to take the course of action
• When the chances of the course of action bringing about a better outcome ceases to exist
• When an administrator or liquidator is appointed.
In view of the foregoing, not all debts are protected. Only debts that are incurred in the period when the course of action commences and the point when the ascertained is reasonably unlikely to bring out the foreseen better outcome. Further, there is no requirement that the director proves or scrutinizes all the debts in order to ascertain that they fall under the safe harbor.
The decision to take reasonable course of action by a director is guided by Section 588GA (2) includes matters that amount to reasonable course of action though it does not define the same. The matters include but are not limited to having financial knowledge of the company, preventing further misconduct and obtaining the requisite exercise.
As provided for by Section 588GA(3) of the Act The director who claims have been made against has the onus to prove that the defence of safe harbor exists. The provision of the safe harbor requirements to the liquidator is an initial proof of meeting the standards. The burden of proof then shifts to the other party or the liquidator who wants the director to be personally liable to prove that the defence of safe harbor does not stand.
3. Who does it (s588GA) protect, and is this different to the business judgment rule s180 (2)? Give reasons. (5 marks)
The safe harbour defence protects the directors who act in good faith with regards to companies that are facing insolvency. The provisions of Section 588GA of the Corporations Act 2001 aim at ensuring that the directors are not victimised or held liable for the genuine and honest actions and decisions that are aimed at realising better outcomes rather than subjecting the company to administration or liquidation.
The business judgement rule provided for under Section 180 (2) of the Corporations Act 2001 serves the same purposes as the safe harbour rule as it seeks to prevent the directors from being held liable for actions of good faith and due diligence . The defence of business judgement is viable if the director in the capacity ensures that there is reasonable standard of care and diligence as well as good faith at the time of action that gives rise to potential liability. The business judgment rule just like the safe harbour does not protect the directors from liability or otherwise reduce their accountability levels but is in place to protect the directors from decisions and actions that are guided by good faith and exercised with due diligence.
The safe harbour defence applies to instances of insolvency of a company. This scope is narrower compared to that of the business judgement rule that applies to all claims of liability against directors that basically emanate from negligence.
4. Are there any restrictions on the operation of the s588GA defence? If so, what are they? (5marks)
There are exceptions to the availability of the safe harbour defence provided for under Section 588 GA of the Corporations Act, 2001. The directors are barred from raising the defence in most instances which are majorly based on matters of compliance and reporting. The defence only exixts when the directors accomplish their duties as per the law and ensuring compliance. Sections 588GA (4) and 588GA (5) provide for the instances under which the directors cannot rely on the defence of safe habour. If the debts are incurred when the company fails to sustainably comply with the relevant laws such as taxation laws, labour laws and financial reporting and such violations and/or infringements have been experienced at least twice in 12 months, the director may not raise the safe harbor defence. The second instance that limits a director from raising the safe harbor defence is when after incurring the debt, the director fails to ensure compliance with various laws and regulations that pertain to their responsibility. Failing to provide the controller of the company with a report on the affairs of the company after the debt has been incurred amounts to noncompliance. Further, when the director fails to provide the report on the affairs of the company to the administrator in the event of voluntary resolution to appoint an administrator. In addition to the foregoing, when an involuntary dissolution has been order, the failure to surrender the books, attend meetings and update the liquidator waives the right to claim the defence of safe harbor.
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? (20 marks)
Insolvency generally refers to the inability of a company or any other business entity to pay the debts when they are due. Voluntary insolvency refers to the circumstances where the company through its directors take the necessary steps towards administration on the realisation of insolvency. The companies always are subject to liquidations, voluntary administration or receivership. The concept of voluntary insolvencies has led to the demise of a significant number of companies. Directors have been cautious not to take reasonable risks as well as exercise innovativeness when the companies start to experience difficulties in finances especially when it comes to honouring the demands of the creditors. The fear of being held personally liable for further debts incurred by a company has pushed away directors from acting to turn around things for the companies.
The coming to effect of the safe harbour defence creates an ample space for the directors to reasonably turn things around for the companies without fear of being held liable in the events of failure or partial success. Prior to the existence of the defence, the safest options for directors upon realising that a company was insolvent was handing it over for liquidation or administration. The existence of the room to come up with solutions such as restructuring, prevention of misconduct, statutory reporting and obtaining expert opinion and advice ensures that the company is able to seek better outcomes.
The protection of the directors who trade while the company is insolvent is key in ensuring that the company and the creditors survive the financial strains and come up in better positions. The voluntary insolvencies have not only been observed to lead to the death of many companies but there has been an outcry on the part of the creditors who are paid significantly lower than what they were owed by the company. The coming up of the safe harbour defence has facilitated more appealing results for most of the insolvent companies and the future seems bright whenever a company finds itself in tough financial positions.
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-mrdaly/10282810 Answer the following questions.
1. Did Mr Daly breach any directors’ duties? If so, which ones and how? (10 marks)
Mr. Daly had duties as a director some of which he breached. He breached the duty of care and diligence which is provided for under Section 180 of the Corporations Act, 2001. Mr. Daly failed to ensure that the necessary steps were taken to secure the interests of the investors to the Fund as per the product disclosure statement.
The duty to act in good faith outlined in Section 181 of the Corporations Act, 2001. The duty demands that company directors act with the best interests of the company at the centre. Mr. Daly in securing loans for personal use from the money that had been invested breached this duty as a director.
Mr. Daly improperly used his position as directors as well as the information pursuant to his position improperly thus contravening Sections 182 and 183 respectively. As a director he was away of the clauses that allowed him to borrow funds from the company as well as the financial position which he used to his benefit and to the detriment of the company.
