Breach of Duty
James, the CEO of the company should be more responsible for the duties he performs. Being the responsible head, he should be able to maintain transparency in the business and therefore should include all the board members for making any business decisions. He should engage himself in performing his duties in all phases of the business and should avoid taking any leaves that would hamper the business activities by any means. Furthermore, including all the board of directors and the members, he should make informed decisions, which are well-researched, well-observed and well-clarified. This is because after the approval of the decision they may not face any confusion regarding the decisions and the results. Contextually, they are recommended to take a calculative decision, which will include deriving predetermined and timely results.
The other members of the company such as the non-executive director Janine and Lucy should actively participate in making strategies that can provide an advantage to the company. Furthermore, they should undertake and evaluate certain criteria for the hiring process so that an appropriate candidate can be hired for performing the job and they should also be given proper training. Besides, their work should be monitored and evaluated so as to check whether it aligns with the business activities and if they are able to maintain a proper record. In this case, they have hired Ross in 2016 as the Company’s Finance Offer without prior knowledge that she is able to manage business transaction. Again, the team of the company failed to monitor the performance of Ross as a result of which, they faced innumerable issues in 2018.
Furthermore, there are few guidelines that can ensure the company for avoiding any breach of duty. The duties include acting within the powers of the position for the benefits of the company. Subsequently, James, Lucy, Janine and Anthony should ensure the replication of the decisions made by the company in the long-term. They should promote and develop an interpersonal relationship with their creditors and banks that encourages and supports the business. Subsequently, it is the board members, who should ensure that all the decisions are actively and fairly updated based on all the important members of the company. As the company is to be restructured, it should focus on developing the reputation of the company with its business partners namely the suppliers and the customers.
Thesis Statement: The reasons that caused Freelance Pty Ltd insolvent are to be highlighted.
This law states the duties of the directors to avoid the company’s insolvent trading (Rodgers Reidy, 2018). This section is applied in a situation where a person positions itself as a director, when the company incurred huge debts, or the company was termed insolvent due to the debt incurred, when the person was the director of the company. Furthermore, it is applicable when there are sufficient reasons to doubt that the company is going to be termed as insolvent or is already insolvent. This section of the law becomes applicable, when the director fails to prevent such situations for the company and even after being aware of failing on certain significant grounds, the company takes no corrective measures for safeguarding itself from the potential risks (Begbies Traynor Group Plc, n.d.; Australian Institute of Company Directors, 2014). Contextually, it is expected that the responsible person of the company should be aware of all the conditions of the company along with its past, present and future positions. In the similar context, the director commits an offence if the company ensures certain debts, leading the company towards insolvency or would be termed insolvent in the near future during his corporate governance (O’Brien Palmer, 2014; Commonwealth Consolidated Acts, n.d).
The Contribution of the Members to the Failure of the Company
Contextually, breach of duty is the term used when one person or company is responsible for the duty of another company or the person but fails to perform the duty. The person is liable for the disadvantages caused due to the breach of duty (Rottenstein Law Group, 2014)
2.2 The Contribution of the Members to the Failure of the Company
James
According to the report James is the CEO of the Freelance Pty Ltd, and for the past fifteen years the company’s establishment James was the part of the Company’s Board of Directors. He being the responsible head of the company was firstly at fault when he failed to share the information about various investments to the other board members. For example, Janine and Lucy have mentioned in the case that they were unaware of the investments made by the company (HG, 2018). Thus, it can be stated that Mr James being the head of the company failed to maintain the transparency of the business through effective communication. Contextually, he has committed an offence according to S588G because he failed to perform his duty (Austlii, n.d.). Although, he was aware that the company’s total liabilities towards unsecured creditors made a huge increase from $800,000 to $1.2 million, he went on a leave for 4 weeks. He is an offender as he left the company’s operation, when the company was falling into debt (Roberstson & Bothman, 2017).
both Janine and Lucy failed to perform their duties as the non-executive directors. Both of them were in their positions when the company became insolvent. Although they claimed that they were unaware of the investments, it was also their duty to determine what was happening in the companies. They have not even taken any corrective measures to save the company against debts (O’Brien Palmer, 2014).
She failed to record the financial transactions of the company in appropriate software, due to which she is responsible for providing incorrect and misstated records to the board of directors. Subsequently, the reports were also found not updated timely. She further failed to inform the non-executive directors of the company to take active measure against the creditors, when they refused to supply goods until the payment was received. The company failed to repay continuously four times to the ATO but Ross did not inform the higher authorities, Janine and Lucy, to be present in the company during that period of time (O’Brien Palmer, 2014).
Later on, Janine and Lucy, who were the non-executive directors, found out about the investments made by the company without their consent. Thus, for re-correcting and managing all the finance-related operations of the company, Anthony was hired and considered a part of the Board members. He is also an offender because he being the accountant provided incorrect information to the management and even wrongly approved $80,000 for purchasing the competitor’s business. After the payment, they identified that it was just the 25% of the total amount that was to be paid. Firstly, he confirmed inaccurate information without prior research which made take a wrong decision. Secondly, they used the money from the trust account, which had the money in name of the property that they had already sold in an auction. They used this money with a belief that they would return back from the commission made on another sale but due to the buying decision of the competitor’s business, their debt became larger than their cash flow (Shepherd Wellness Community, 2018; Geoffrey Clews, 2008).
Remedy
REMEDY
- Remedyin case of James Breach of duty
In the case of James’ breach of duty, under Sec 588G, he was found to have committed an offence as the Freelance Pty Ltd incurred debt on being the CEO. The Proposed Legislation, Sec 588GA(1) relates to Sec 588G(2) liability, which are the sections dealing withcivil penalty breach. However, this has no alignment with criminal liability under Sec 588G (3), where the cause of the breach is due to dishonesty. Thus, this case is brought under sub-section (2), because the burden liable for the prosecution of dishonesty has made a civil penalty case more prudent (Roberstson & Bothman, 2017; Parliament of Australia, n.d.).
Under Section 206C of the Act, James can be sued and a penalty can be imposed on him for the irresponsible activities he performed being the CEO of the company. It was his irresponsibility that he went for a leave, when the company required his efforts to solve the issues with appropriate methods. Under this section, James can be disqualified as a director to manage companies further. Besides, under section 1317G of the act, he can be imposed a fine of up to $200,000. He is further an offender under Defense Section 180(2), as he failed to make an informed decision about the investment made by the company to the other executive directors. This action is also offensive in nature, under the sections pertaining to the Breach of duty for failing to perform their respective responsibilities (Roberstson & Bothman, 2017; Parliament of Australia, n.d.).
- Remedy for Janine And Lucy Breach of duty
Janine and Lucy, being the executive directors of the company possesses a fewer idea of what is happening in the company and therefore it can be stated that they fail to performing their duties. Although, being aware of the fact that the company was incurring huge debts, they did not take any active strategies that could prove to be advantageous for the company. Thus, both of them are liable for the fine under Good Faith section 181 as they have not exercised their powers for the interests of the company (O’Brien Palmer, 2014).
It is the right as well as the duty of the executive directors to safeguard the company. Furthermore, they were also a part of the board meeting, wherein the decision of purchasing the competitor’s business was approved based on inadequate and inappropriate information that actually caused a huge disadvantage to the company. It was one of the most wrongful trading in the true sense (ICAEW, 2018).
- Remedyfor Ross Breach of duty
Ross was hired as the Company’s Financial Officer (CFO) and was held responsible for managing relevant accounts appropriately. However, she failed to record the transactions as required by the company. Furthermore, the use of the software was inappropriate and the accounts were not updated with correct figures that provided the wrong information to the Board of the Directors. Thus, under Use of Position section, Ross can also be regarded as an offender since in 2016, she was appointed the CFO for managing the company’s financial operations (O’Brien Palmer, 2014). She also failed to use her position for the betterment of the company that caused a disadvantage to the company operations. She also failed to use the appropriate knowledge for accessing the accounts for 2 years, while her reports did not align with the bank accounts and her weakness in performing as the CFO hampered the business to a large extent (Austlii, n.d.a, n.d.).
- Remedyfor Anthony Breach of duty
He was not only hired for restructuring the company but was also as the board members. Therefore, under trust liabilities section 197 of the Act, Anthony can be sued as he is an offender whose action has caused a major setback for the company (Geoffrey Clews, 2008). Subsequently, the use of information, section 183, he can further be sued as he was allotted for making approval for the decision that was more than $10000. Due to his failure in making an approval with less knowledge, he approved the decision of buying the competitor’s business using Freelance Pty Ltd.’s trust money. This further increased the company’s total liability to such an extent, which affected the operation of the business at least to some extent (CCH Australia Limited, 2018; CCH Australia Limited, 2018a).
It has been identified that the company became insolvent because of the reasons such as negligence of the directors, executives and the board members. They further kept the insufficient overview over the working and operations of the business activities. They had no monitoring over the business financial transaction and also over the hired employees for performing the job. Contextually, they made decisions that were without acknowledging the outcome of the decision. Even after all the members were aware of the liabilities incurred by the company, it is the duty of the members to take timely measures that can solve the problems and reduce the debt to some extent. Correspondingly, they failed to provide appropriate training to Ross so as to handle the situation that might arise from the suppliers for the non-payment. It is of utmost importance to balance and maintain the business relationships with the suppliers and to improve the flow of business.
Accordingly, there are remedies, which can successfully be avoided in case of the Breach of Contract. Thus, for restructuring the Freelance Pty Ltd and for making the business successful, it is important to contribute to the flow the responsibilities and duties that are imposed by the business laws and regulations.
References
Austlii, n.d, Corporations Act 2001 – SECT 588G director’s duty to prevent insolvent trading by company, Commonwealth Consolidated Acts, viewed 15 September 2018, <https://www.austlii.edu.au/cgi-bin/viewdoc/au/legis/cth/consol_act/ca2001172/s588g.html>.
Austlii, n.d.a, Corporations Act 2001 – Sect 182, Commonwealth Consolidated Acts, viewed 15 September 2018, <https://classic.austlii.edu.au/au/legis/cth/consol_act/ca2001172/s182.html>.
Australian Institute of Company Directors, 2014, ‘Insolvent trading’. Duties of directors, pp. 1-4.
Begbies Traynor Group Plc, n.d, What are directors’ duties and consequences of breach?, Home, viewed 15 September 2018, <https://www.begbies-traynorgroup.com/articles/director-advice/what-are-directors-duties-and-consequences-of-breach>.
CCH Australia Limited, 2018, Corporations Act 2001, Section 183 use of information — civil obligations, Home, viewed 15 September 2018, <https://iknow.cch.com.au/document/atagUio485899sl14504567/corporations-act-2001-section-183-use-of-information-civil-obligations>
CCH Australia Limited, 2018a, Corporations act 2001, section 184 good faith, use of position and use of information — criminal offences, Home, viewed 15 September 2018, <https://iknow.cch.com.au/document/atagUio485900sl14504575/section-184-good-faith-use-of-position-and-use-of-information-criminal-offences>
Commonwealth Consolidated Acts, n.d, Corporations Act 2001 – SECT 588G, Austlii, viewed 15 September 2018, <https://classic.austlii.edu.au/au/legis/cth/consol_act/ca2001172/s588g.html>.
Geoffrey Clews, 2008, The liability of directors of a corporate trustee, Tax Counsel, viewed 15 September 2018, <https://www.taxcounsel.co.nz/Resources/Publications+papers+and+commentary/The+Liability+of+Directors+of+a+Corporate+Trustee.html>
HG, 2018, Negligence & breach of duty of care, Articles, viewed 15 September 2018, <https://www.hg.org/legal-articles/negligence-and-breach-of-duty-of-care-20316>
ICAEW, 2018, Case law: When directors can be personally liable on company insolvency, Learning and development, viewed 15 September 2018, <https://www.icaew.com/archive/library/subject-gateways/law/insolvency/legal-alert/when-directors-can-be-personally-liable-on-company-insolvency>.
O’Brien Palmer, 2014, Why would anyone want to be a director?, Home, viewed 15 September 2018, <https://obp.com.au/director-duties/>.
Parliament of Australia, n.d, Treasury Laws Amendment (2017 Enterprise Incentives No. 2) Bill 2017, Home, viewed 15 September 2018, <https://www.aph.gov.au/Parliamentary_Business/Bills_Legislation/Bills_Search_Results/Result?bId=r5886>
Roberstson, A & Bothman, C, 2017, Safe harbour for directors’ duty to prevent insolvent trading gains momentum, Lavan, viewed 15 September 2018, <https://www.lavan.com.au/advice/recovery_reconstruction_insolvency/safe-harbour-for-directors-duty-to-prevent-insolvent->.
Rodgers Reidy, 2018, The role of a director: Duty to prevent insolvent trading, Articles, viewed 15 September 2018, <https://www.rodgersreidy.com.au/articles/articles/the-role-of-a-director-duty-to-prevent-insolvent-trading>
Rottenstein Law Group, 2014, What is “breach of duty”?, Home, viewed 15 September 2018, <https://www.rotlaw.com/legal-library/what-is-breach-of-duty/>.
Shepherd Wellness Community, 2018, The basic responsibilities of a board and the legal duties of board members, Home, viewed 15 September 2018, < https://www.swconline.org/get-involved/become-a-board-member/responsibilities-and-duties-of-board-members/>.
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