The Working of the Corporation Act 2001
- Can ASIC bring civil or criminal actions against Liam and Peta for violation of duties?
- What penalties can ASIC seek against Peta and Liam?
The Corporation Act 2001 governs the working of the company. The working of the company is carried by company directors. Any person who is placed as director or acting as director is a company director under section 9. As per Grimaldi v Chameleon Mining NL (No 2) (2012), shadow, de facto and executive directors falls in the definition of director. (Bottomley et al 2017)
There are statuary duties that a director must comply with. One of the significant duties is to avoid insolvent trading.
Section 588G of the Act submits that a person is found to be trading insolently when: (Purslowe 2011)
- A debt is raised by the director while indulging in the acts of the company. A debt is said to be incurred when the assets of the company fall short of the liabilities.
- The debt is raised which resulted in the insolvency of the company or there are chances that the company might become insolvent (The Bell Group Ltd (in liq) v Westpac Banking Corporation (No 9)(2008);
- When the debt is incurred then at that time the person is the company director.
But, a director can protect himself by claiming defense under section 588H which submits that the acts of the director:
- are taken by taking all reasonable care and diligence Hall v Poolman(2007);
- was not part of the transactions when the debt is incurred;
- relied on expert opinion before taking the decision.
When any director is found to be in violation of section 588G of the Act, then, civil liabilities can be imposed which includes disqualification, fines and compensation. Criminal proceedings can be initiated of the director has acted with dishonesty.
ME Enterprises Pty Ltd (company) have directors/shareholders as Peta and Liam.
Peta is the company director as per section 9 of the Act and must comply with all the duties.
She is carrying the day to day activities. She was also involved in marketing and growing of the company. Peta is liable for violating section 588G because of the transactions that exist amid May –June 2017:
- Various transactions are made by Peta which resulted in the incurrence of debt
- She reviews the financial position but does not question the balance sheet prepare by the employees
- In May 2017, direction is issued to pay the angry suppliers and delay the payment of the ones who are not essential to the business.
- In June 2017, a tax notice was received from ATO for dues;
- No taxes were paid and no change is made to the company expenditure.
- Even after the incurrence of debt, the company was operated till June 2017 wherein the assets fall short of the liabilities. Thus, the acts of Peta resulted in the insolvency of the company.
- When the transactions took place which results in the liability of the company at that time Peta was the director of the company;
Thus, Peta was found to be in violation of section 588G of the Act as she was the company director when the debt was incurred which resulted in the insolvency of the company.
However, she can rely on the defenses mentioned under section 588H of the Act.
Liam is the non executive director and as per section 9 of the Act, she is the company director and must comply with all the duties. However, she is not in violation of section 588G of the Act because when the insolvency is incurred at that time, May-June 2017, she was taking the treatment for cancer.
If action is initiated against Peta by ASIC, then, civil action can be bought and she can be disqualified from the post of the director. Fines and compensation can be imposed.
Conclusion
Thus, Pets is in violation of section 588G but can take the defense under section 588H. Liam is not liable as she was not the director when insolvent trading took place.
- Can CloudTech question the contract amid Gnosis and Banger?
- Can CloudTech sue Alexandra for breach of his duties?
A company once formed has distinct legal personality in law. A colony is distinct and cannot be associated with the directors and officers of the company. The acts which are taken by the company are in its own name and not in the name of the directors (salmon v salmon (1897).
Every director must comply with few statuary requirements as mentioned under the Corporation Act 2001: (Adams 1997)
- As per section 182 no director must misuse his position;
- As per section 183 no information of the company that is acquired by a company director must be misused by him;
- As per section 180 (1) the acts of the director must be carried out with care and diligence ASIC v Adler(2002)
- As per section 181 of the Act, the acts of the director must be carried out in good faith.
CloudTech have director/shareholder as Alexandra, James and Simone. Alexandra wanted to bid in the music industry (Gnosis) which was not allowed by James and Simone.
Alexandra in 2018 incorporates a company Banger. He is the shareholder and director. As per salmon v salmon Banger is an artificial legal personality and is not associated with Alexandra. Any acts carried by Banger are in its own name.
So, when Banger made a contract with Gnosis by biding for the contract then Alexandra is no where involved. Thus, the contract is binding and CloudTech cannot question the contract.
Alexandra in 2018 takes the client list of CloudTech and uses the same for his company banger. Though none of the clients agree to invest with banger. However, Alexandra acts are in violation of his duties towards CloudTech.
He being the director of CloudTech misused his position and take the confidential information of CloudTech. Thus, there is violation of section 182 and 183 of the Act. Also, the acts are not carried out in good faith and in the interest of the company thus there is violation of section 181 of the Act. The acts are with no care and diligence and thus Alexandra violated section 180 of the Act.
Thus, there are several duties that are vaulted.
Conclusion
CloudTech cannot question the contract amid banger and Gnosis.
CloudTech can sue Alexandra for the violation of the statutory duties that are imposed upon him while carrying his duties of a director
Reference list
Books/articles/Journals
Bottomley et al, (2017) Contemporary Australian Corporate Law, Cambridge University Press.
Michael Adams (1997) Australian Essential Management Law, Routledge.
Ryan Purslowe (2011) Decisions In The Twilight Zone Of Insolvency – Should Directors Be Afforded A New Safe Harbour?< https://www.austlii.edu.au/au/journals/UNDAULawRw/2011/5.pdf>.
Case laws
ASIC v Adler (2002)
Grimaldi v Chameleon Mining NL (No 2) (2012)
Hall v Poolman (2007) 215 FLR 243;
salmon v salmon (1897).
The Bell Group Ltd (in liq) v Westpac Banking Corporation (No 9) (2008) 225 FLR 1
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