Corporation Act 2001 and Directors’ Duties
Question One Issues 1
Are there grounds to bring actions by ASIC against Liam and Peta liable?
Law
In Corporation Act 2001, a company is an artificial legal person. Section 198A of the 2001 Act authorizes the directors to act on behalf of the company and is held in Howard Smith Ltd v Ampol Petroleum Ltd (1974). A director is defined under section 9 of the 2001 Act and is person who is appointed as director, acts like a director, de facto director, shadow director and executive director and is held in Salmon v Salmon [1897]. (Dermansky 2018)
Amongst various duties that a director must comply under Part 2D.1 of the Act 2001, one of the duty is mentioned under section 588G of 2001 Act.
Section 588G imposes an obligation on the directors that their acts must not result in insolvency of the company. The components of section 588G are: (Purslowe 2011)
- When the insolvency is incurred the wrongdoer is the company director;
- That dent is raised by the director Re Timbatec Pty Ltd and the Companies Act [1974];
- That because of debt the company is insolvent or deems to be insolvent (McLellan in the matter of The Stake Man Pty Ltd v Carroll [2009].
But, if the director can prove that he decision of raising debt was based on professional advice or he was not the director when the debt was raised or he acted with all care and diligence then he can be protected under section 588H.
Application
Liam and Peta are directors/shareholders of ME Enterprises Pty Ltd (company)
Peta is found to be in violation of section 588G because:
- She was involved in the daily working, growing and marketing of the company;
- The balance sheet is prepared by the employees which are not questioned by Peta;
- The company is not able to pay all of its suppliers and complaint are received in May 2017;
- A notice for nonpayment of taxes were received from ATO in June 2017
- Even when the financial position of the company is not sound still no changes are made to the company expenditure;
- The liability is found to be in excess of the assets.
Thus Peta was the company director when the expenditures are incurred. Because of the expenditure the company is deem to become insolvent. Thus, Peta is liable for the breach of section 588G of the Act.
Liam was the non executive director and thus as per section 9 she must comply with the requirement of section 588G. But, when the debt was raised at that time she was hospitalized (treatment for cancer) and thus under section 588H no action can be raised against her.
Conclusion
Yes, there are grounds to bring civil and criminal actions against Liam and Peta for breach of section 588G of the Act.
Issue 2
What penalties could ASIC seek from the court?
Law
When any director is found to be in breach of section 588 G, then, the penalties includes: (Gibson and Fraser 2013)
- Civil penalties in the form of:
- Fine
- Disqualification under section 206C of the Act;
- Pecuniary penalties of $2,00,000
- If the acts are done with dishonest intention and recklessness then imprisonment of 5 years along with one can be imposed.
Application
Liam was not found to be in violation of section 588G thus there is no liabilities that can be imposed on Liam.
But, Peta was reckless in his action as he continued the expenditure to incurred even being aware that the financial position of the company is not sound. Thus, Peta can be imprisoned or 5 years long with fines and compensation.
Breach of Section 588G by Liam and Peta
Conclusion
Thus, ASCI can impose both the civil and criminal liabilities against Peta but no action can be taken against Liam.
Question 2
Issue 1
Can CloudTech take action against Alexandra regarding the contract between Gnosis and Banger.
Law
In Australia, a company is formulated once the same is registered.
When company is registered then one of the significant feature that is attributed by the company is separate legal personality. Separate legal personality of the company submits that a company is distinct from its members and officers. The acts that are carried out by the officers are on behalf of the company and no personal actins must be taken against them. Thus, a company has a capacity to enter into contract with the help of its officers but the contract is binding upon the company alone (Salmon v Salmon [1897]. (Shum 1991)
Application
Alexandra, James and Simone are the officers of CloudTech. Alexandra is interested in the deal provided by Gnosis and wants to bid in the company. But, Simone and James had rejected his proposal.
In February 2018 Banger, a company made by Alexandra and he is the sole shareholder and director. Bid at Gnosis and secured the contract.
By applying the rule in salmon v salmon, Banger is an artificial legal person and is not associated with Alexandra. Acts that are carried out by Banger are its personal ct and are binding on the commonly alone.
Conclusion
Thus the contract by Banger wit Gnosis is carried in its individual capacity and thus Alexandra cannot be held liable.
Issue 2 Can CloudTech take action against Alexandra’s use of CloudTech’s client list
Law
A company director is the authorized representative of the company and acts on behalf of the company. Some of the duties that must be catered by company director are: (Adams 1997)
- Duty of care and diligence under section 180;
- Duty to act in good faith under section 181;
- Duty to avoid conflict of interest under section 11-195 of the Act;
- Duty not ton misuse position under section 182;
- Duty not to misuse company information under section 183;
Application
Alexandra while acting for Banger wasn’t to take the client list of CloudTech in which he is also a director). Before resigning he takes the list of the clients of CloudTech.
It is submitted that Alexandra has violated section 182 as he misuses his position in his own interest. He also uses information for his own gain and thus violated section 183. The acts are carried without care and diligence and not in good faith thus he also violated section 18-181 of the Act.
Alexandra personal interest (Bagers interest) coincide with the interst of CloudTech and he gave preference to his own interest resulting in breach of section 191-195 of the Act.
Conclusion
CloudTech can take action for breach of his statutory duties against Alexandra.
Reference List
Books/Articles/Journals
Dermansky, P. (2018) Should Australia Replace Section 181 Of the Corporations Act 2001 (Cth) With Wording Similar to Section 172 of the Companies Act 2006 (UK)?.
Gibson and Fraser (2013) Business Law 2014, Pearson Higher Education AU.
Michael Adams (1997) Australian Essential Management Law, Routledge.
Purslowe, R. (2011) Decisions In The Twilight Zone Of Insolvency – Should Directors Be Afforded A New Safe Harbour?
Shum, C. (1991) Business Associations, Second Edition, Hong Kong University Press.
Case laws
Howard Smith Ltd v Ampol Petroleum Ltd [1974]AC 821.
McLellan in the matter of The Stake Man Pty Ltd v Carroll [2009] FCA 1415;
Re Timbatec Pty Ltd and the Companies Act [1974] 1 NSWLR 613.
Salmon v Salmon [1897] [1897] AC 22.
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