Breaches Of Directors’ Duties And Legal Action By ASIC And Cloudtech’s Pursuit Of Legal Action Against Alexandra

Summary of Scenario 1

1 Issue

A company has two directors Liam and Peta. The company has not been paying its creditors and thus has been receiving calls for the same. It is determined that it cannot discharge all its debts at once and thus the company prioritizes which creditors to pay and which ones to keep on hold under the instructions of the directors. There also unpaid tax obligations which the company cannot pay. The issue here is to determine if by such transactions the directors have breached their statutory obligations for which they can be pursued by the ASIC for civil and/or criminal liabilities and the penalties that can be awarded for the same.

Section 95A (1) of the Corporations Act, 2001 states that when a corporation is unable to meet its debts it would be considered insolvent. This is reaffirmed in Section 95A (2) of the act. As laid down in the case Sutherland v Hanson Construction Materials Pty Ltd [2009] NSWSC 232 when the cash flow of a company is not sufficient to cover all its debts it would be considered insolvent.

The Corporations Act, 2001 prohibits a company from entering into transactions and the directors of a company must ensure that is ceases to trade when it can no longer meet its debt obligations. Section 588G lays down the statutory provision for the same. As per Section 588G (3) of the act if the company continues insolvent trading dishonestly the directors would be criminally liable.

When imposing liability, in case of a civil action the penalties that maybe awarded by the ASIC are:

• Disqualifying the directors of the company from future company management;
• Impose a substantial fine;
• Ask for compensation to the company in terms of the losses of its creditors as per Section 588J of the act.

In case of criminal proceedings the provisions of Section 588K state that the director will be criminally liable to compensate the company for losses suffered by its creditors.

The set of given circumstances evidently show that the company could not meet its debts yet it continued to transact and incur further debt. Thus following the judgment in Sutherland v Hanson Construction Materials Pty Ltd [2009] NSWSC 232 and the provisions of Section 95A (2) the company would be deemed insolvent. Thus the further trades undertaken by the company would constitute a breach of the director’s statutory duties under Section 588G of the act. Thus ASIC could impose civil penalties on both the directors as stated above.

Liam however was a cancer patient at the time of the incidents and thus he did not have knowledge of the financial status of the company. Thus he was not acting dishonestly and thus could not be pursued under criminal charged prescribed under Section 588K of the Corporations Act.

Conclusion:

• The ASIC would be able to sue both Liam and Peta for civil liabilities. The criminal case however can only be initiated against Peta.
• In the civil case the ASIC may award the following damages:
• Disqualifying the directors of the company from future company management;
• Impose a substantial fine;
• Ask for compensation to the company in terms of the losses of its creditors as per Section 588J of the act.

In the criminal case the ASIC can demand compensation for the losses of the creditors which is to be paid to the company.

2. Issue

In this scenario the issue is if the directors of CloudTech can legally pursue Alexandra for a contract which has been executed between Banger Pty Ltd and Gnosis records and for the use of a client list that belonged to CloudTech.

Salomon v A Salomon and Co Ltd [1897] AC 22 states that a company is distinct from its owner and thus is a separate legal entity. Thus a company’s liabilities are not the same as an individual’s (owner’s).

Section 183 of the Corporations Act, 2001 states that information that is gained due to a person’s position in a company cannot be used to get an advantageous position for oneself or a third person. It also prohibits causing detriment to the company by using the same. Thus a director must observe this duty. This duty does not cease to exist when the person resigns from such a position.

In this case CouldTech had agreed to not enter into the bidding for the contract with Gnosis Records. Thus when one of its directors (Alexandra) incorporated her own body corporate Banger Pty Ltd and entered into the contract with Gnosis Records it would not be illegal. This is because the Corporations Act, 2001 does not prohibit an individual from occupying the position of director in two different companies. This is legal as long as there is no undisclosed conflict of interest. This also follows the judgment in Salomon v A Salomon and Co Ltd [1897] AC 22.

Alexandra was a director of CloudTech and thus obtained the client list by virtue of her position as director. She would use this list to get more clients for Banger Pty Ltd and thus was using the list to gain an advantage for herself. This would thus be a clear breach of her duties under Section 183 of the Corporations Act, 2001.

Conclusion:

Thus the remaining directors of CloudTech cannot sue Alexandra for her company’s contract with Gnosis Records as this is not prohibited by the act in any way.

The directors would be able to initiate a case against Alexandra for her use of information which was breach of her duties under Section 183 of the Corporations Act, 2001.