Discussn about the cases dealing with directors’ breaches of duties under the Corporations Act 2001 (Cth). Students may show their chosen case to their lecturer for confirmation prior to commencing their group report.
The directors of the companies in Australia have the responsibility of governing the company for the shareholders of this company. Section 198A(1) of the Corporations Act (CA) puts forth the requirement of business of companies being managed under the directors of directors of the company. Due to these reasons, certain responsibilities and duties have been embarked upon the directors of the company in a general and legal manner. CA puts forth a number of duties on the directors which include the duty of care and diligence, and also the duty of acting in a manner showing good faith (Australian Institute of Company Directors, 2018).
The leading matter of ASIC (Australian Securities and Investment Commission) v Edwards (No 3) (2006) 57 ACSR 209 proves to be an example of breaching duty of directors provided under the CA. This was held by the Supreme Court of New South Wales. The allegations made against the directors were that the provisions of CA had been breached, by undertaking debts by company. This was deemed as insolvent trading later on (GML Consulting, 2018).
The ASIC initiated legal proceedings against Malcolm Edwards. This led to the NSW Supreme Court considering whether the company directors engaged in the project’s construction phase, could be made responsible in order for the company indulging in insolvent trading. In this case, the company was Murray River Limited (MR), which went by the name of Murray River Pty Limited. Edwards was the director of the company from the period of 07/1998 to 03/2000. A joint venture had been entered on 22 December 1998 by the company with regards to the development of apartment hotel on the Mulwala lake shores at Murray River. The contentions put forth by the ASIC were that the director had been in breach of section 588G of CA owing to his permission in the company to incur debts on six different accounts. This led to him failing in preventing the company from undertaking such debts (Allens, 2006).
The situation which led to Edwards trading for the company, made the section 588G apply on six different bases. Regarding these debts, Colin Joss & Co Pty Ltd (CJ) was creditor who was the building contractor. The allegation was that the six debts had been owed as a result of the undertaken contract between MR and CJ, to CJ by MR, based on the work done by CJ. The debts which had been alleged for transactions undertaken on 1999, which includes 27 April $390,000, 10 May $ 635,000, 20 May $ 1,340,000, 18 June $ 859,370, 22 June 1999- $ 183,889, and 24 September $ 181,772 (GML Consulting, 2018).
A case was made against Edwards by the ASIC where the failure of Edwards was highlighted in context of not preventing MR from taking more debts, more so a range of debts, which led to the provisions of CA, particularly section 588G being breached. Reliance was made by ASIC on subsection 2 of this section which is related to the individuals or the companies violating this section where they fail in preventing insolvent trading resulting in debts being incurred and which led to the company being insolvent. This is particularly for cases in which the person has the knowledge that undertaking the particular trading would have the result of company’s insolvency when the debts were undertaken; or where the person had reasonable grounds of believing that this would happen (GML Consulting, 2018). By indulging in such debts when Edwards was director or MR, he failed in fulfilling the requirements laid down under this section (Castle, 2015).
When these claims were made by ASIC, clarifications were made by Edwards regarding the company being solvent at every material time period which had been highlighted by ASIC. There were no reasonable grounds at any time frame regarding the company being insolvent or that the company had the chance of becoming insolvent. Edwards stated that there were reasonable grounds for excepting the solvency of the company, along with the solvency of MR to be continued. Apart from the reasonable grounds for believing the same, he did believe that the company would be able to meet their obligation when they became due on the company. Edwards further believed that there were enough resources and assets in the balance sheet of MR (Allens, 2006).
He further stated that the allegations of ASIC were not due and were not payable owing to the conduct undertaken by CJ, which restricted them from enforcing any debts owed but the company. This was along with the fact that the risk of going forward with continuing work on the project was assumed by CJ. Lastly, the contract never meant that a debt had been incurred by the company. There was a right of indemnity by the company where the debt had been occurred from the other company for debt. As the company had been the beneficiary of the construction trust that resulted, the right of indemnity and beneficial interest had to be deemed as the asset of company. In all these replies, he went on to state that there were presence of genuine reasons for having the faith in the company being able to meet their debts by making reliance on resource which had been out of the balance-sheet of company (GML Consulting, 2018).
Edwards raised the defence provided under section 588H of CA and repeated the presence of genuine reasons at every time and for believing that competent and reliable individuals providing him with the relevant information were giving him right information regarding the company being solvent and that the company being able to comply with their responsibility in a proper manner. Relying on this information, he had believed that the company would have continued to be solvent at all time (GML Consulting, 2018).
Under section 588G of the CA, the directors are put with the duty of preventing insolvent trading by the company. Where an individual is the director of a company when the debt was incurred, and at that time the company was insolvent, or the result of undertaking the transaction would be the company being deemed as insolvent, based on the reasonable grounds being present for suspecting the insolvency of company, or resulting insolvency of company, this section is deemed to be contravened. The section further provides that the view of a reasonable person in similar situations has to be undertaken for holding the breach of this section, where it is to be deemed that an individual in similar situation would have avoided taking of such debt or transaction, resulting n insolvency of the company. It is deemed as an offence to prevent the breach of this section where the elements of dishonesty are involved (Austlii, 2018).
In this case, the court analysed the facts in detail and stated that Edwards had failed in preventing the company from indulging in insolvent trading as the company incurred a number of debts. This led to the court making a declaration of contravention based on section 1317E(1) of CA (Justis One, 2018).
In doing so, the court stated that the success of ASIC claims was stemmed in showing the quoted section being breached by Edwards. For this purpose, there was a need for the ASIC to show that Edwards had been the company director when the debts were undertaken; the company was already insolvent at such time, or the resulting of undertaking these debts was the company becoming insolvent; there was presence of enough reasons during that time to show that the company had been insolvent or that there were chances of the same happening by undertaking this debt; there was a failure by the director in preventing the company from doing the same; and that the director knew, based on the view of a prudent person, of the presence of such grounds, resulting in Edwards breaching his director duty (GML Consulting, 2018).
Once the ASIC could show that these elements had been present in this case, the breach of section 588G would have been established. Though, this would fail where Edwards is able to satisfy the conditions laid down under section 588H of CA, even with satisfaction of section 588G. Thus, in the view of the court, where Edwards could show that at the debt incurring time, there was presence of genuine reasons to believe that a competent person, other than Edwards himself, had been liable for making the information available on solvency of the company and this person has had fulfilled such responsibility; and that based on this available information, the company was expected to stay solvent even with incurring of the debt (GML Consulting, 2018).
With this, Edwards also had to show that he had taken all requisite steps from restricting the company from undertaking the debts which could make the company insolvent. For showing this condition as fulfilled, the court undertook examination of the actions undertaken by different individuals and the result of these undertaken actions. In context of section 588G (1) of CA, the judges stated that the debts had been undertaken by the company when Edwards had been the director of company, on all six occasions (Harris, 2008). It was also established by the judges that on all six counts, the company had been insolvent. This was due to the defendant raising the point regarding condition of balance sheet and outside sourcing. This led to them holding that the requirements of the quoted sections had been fulfilled (Lhuede & Alderman, 2009).
In the opinion of the court, there were reasonable reasons to doubt the solvency of company (Chamberlains SBR, 2018). A reasonable person in place of Edwards, holding the directorship of the company would have failed in establishing that there was enough sum to pay the debts of the company, as was deemed by the defendant. Similarly, the court analysed subjection 2 of this section where they stated that there had been a clear failure on part of Edwards in stopping the company from being a part of insolvent trading (GML Consulting, 2018). Thus, section 588G was breached here.
The conduct of Edwards was not but immoral, wrong, not at all straightforward, and showed elements of dishonesty and moral turpitude (Lewis, 2010; Wong, 2009). Edwards indulged in such activities where the innocent creditors were embarked on a course of conduct, which was detrimental for them in view of the court. Here, the sole purpose was Edwards benefiting himself (BRI Ferrier, 2015). There had been noteworthy blunders undertaken by Edwards, coupled with him being dishonest in his work (Australian Institute of Company Directors, 2014). In view of the court, the company was insolvent when the project was started and all throughout the project the company continued to be insolvent (Austlii, 2006). As per the judges, Edwards clearly knew about the financial position of the company and also knew that by taking these debts the insolvency of the company would continue. There was a breach of the quoted duties of CA based on this information (Austlii, 2005). This led to the court awarding penalty to Edwards and also disqualified him from taking post of director, for ten years, of any company (Mansor, 2011).
Conclusion
Thus, this case presents crucial insights on the role played by the directors in keeping the company on right track in terms of not undertaking such activities which would result in the company being deemed as insolvent. This case is a reminder for deploying proper governance of the companies by directors. And also shows that not doing so is not only detrimental for the company, but also for the directors indulging in such breaching conduct. The failure of Edwards not only resulted in the company indulging in insolvent trading, but also led to him being disqualified from being a director of any company. Thus, this case is guidance to the directors of the other companies in the nation, to be sure of the solvency of the company before they incur further debts, and to not incur debts when insolvency is a looming threat.
References
Allens. (2006). Annual Review of Insolvency & Restructuring Law. Retrieved from: https://www.allens.com.au/pubs/pdf/arir/2006/arirmain.pdf
Austlii. (2005). ASIC v Edwards [2005] NSWSC 831 (24 August 2005). Retrieved from: https://www.austlii.edu.au/au/cases/nsw/NSWSC/2005/831.html
Austlii. (2006). ASIC v Edwards [2006] NSWSC 376 (5 May 2006). Retrieved from: https://www.austlii.edu.au/au/cases/nsw/NSWSC/2006/376.html
Austlii. (2016). Corporations Act 2001 – Sect 588G. Retrieved from: https://www.austlii.edu.au/au/legis/cth/consol_act/ca2001172/s588g.html
Australian Institute of Company Directors. (2014). The Honest and Reasonable Director Defence. Retrieved from: https://fsi.gov.au/files/2014/09/Australian_Institute_of_Company_Directors_Attachment_A.pdf
Australian Institute of Company Directors. (2018). What are the duties of directors?. Retrieved from: https://www.companydirectors.com.au/membership/the-informed-director/what-are-the-general-duties-of-directors
BRI Ferrier. (2015). Exoneration of directors from insolvent trading liability. Retrieved from: https://briferrier.com.au/news/exoneration-of-directors-from-insolvent-trading-liability
Castle, T. (2015). Developments in insolvent trading law in 2015. Retrieved from: https://www.sparke.com.au/insights/developments-in-insolvent-trading-law-in-2015/
Chamberlains SBR. (2018). Insolvent Trading & A Directors Duty not to be in Breach. Retrieved from: https://www.chamberlainssbr.com.au/PDF/Trade%20paper.pdf
GML Consulting. (2018). Australian Securities Investment Commission v Edwards [2005] NSWSC 831. Retrieved from: https://www.adjudication.co.uk/archive/view/case/526/australian_securities_investment_commission_v_edwards_%5B2005%5D_nswsc_831
Harris, J. (2008). Relief from Liability for Company Directors: Recent Developments and Their Implications. University of Western Sydney Law Review, 12(1).
Justis One. (2016). ASIC v Edwards 2004. Retrieved from: https://app.justis.com/case/asic-v-edwards/overview/c5Ctn4etm5Wca
Lewis, P.J. (2010). Insolvent trading defences after Hall v Poolman. Retrieved from: https://sites.thomsonreuters.com.au/journals/files/2010/10/j04_v028_CSLJ_pt06_lewis.pdf
Lhuede, M., & Alderman, P. (2009). The Director`s Duty to Prevent Insolvent Trading. Retrieved from: https://www.tved.net.au/index.cfm?SimpleDisplay=PaperDisplay.cfm&PaperDisplay=https://www.tved.net.au/PublicPapers/April_2009,_Sound_Education_in_Law,_The_Director_s_Duty_to_Prevent_Insolvent_Trading.html
Mansor, H. (2011). Solvency, Company Directors’ Duties and the Problem of Process and Enforcement- A Comparative Study. Retrieved from: https://researchcommons.waikato.ac.nz/bitstream/handle/10289/5851/thesis.pdf?sequence=3
Wong, S. (2009). Forgiving a Director’s Breach of Duty: A review of recent decisions. Retrieved from: https://law.unimelb.edu.au/__data/assets/pdf_file/0006/1709772/58-stevenwong_essay_6_May_20091.pdf
Essay Writing Service Features
Our Experience
No matter how complex your assignment is, we can find the right professional for your specific task. Contact Essay is an essay writing company that hires only the smartest minds to help you with your projects. Our expertise allows us to provide students with high-quality academic writing, editing & proofreading services.
Free Features
Free revision policy
$10Free bibliography & reference
$8Free title page
$8Free formatting
$8How Our Essay Writing Service Works
First, you will need to complete an order form. It's not difficult but, in case there is anything you find not to be clear, you may always call us so that we can guide you through it. On the order form, you will need to include some basic information concerning your order: subject, topic, number of pages, etc. We also encourage our clients to upload any relevant information or sources that will help.
Complete the order form
Once we have all the information and instructions that we need, we select the most suitable writer for your assignment. While everything seems to be clear, the writer, who has complete knowledge of the subject, may need clarification from you. It is at that point that you would receive a call or email from us.
Writer’s assignment
As soon as the writer has finished, it will be delivered both to the website and to your email address so that you will not miss it. If your deadline is close at hand, we will place a call to you to make sure that you receive the paper on time.
Completing the order and download
