Corporations Law Governing Companies - Click to Solution

Question: Describe about the Corporations Law for Governing Companies. Answer: Introduction The directors are the people responsible for governing the company, on behalf of the shareholders. Corporations Act, 2001, in section 198A (1) provides that the business of any company has to be managed by, or has to be managed under the directions given by the director. This embarks some duties, as well as, responsibilities on all the directors, both generally and legally. Corporations Act chalks out a number of duties for the directors, for instance, duty to act with good faith, and duty of care and diligence (Australian Institute of Company Directors, 2016). In one of the famous cases of ASIC (Australian Securities and Investment Commission) v Edwards (No 3) (2006) 57 ACSR 209, the breach of the directors duties covered in the Corporations Act, was established by the Supreme Court of New South Wales. The directors in this case, were alleged to have contravened the sections of the Corporations Act, due to which a number of debts were incurred by the company, which was ultimately considered to be insolvent trading (Adjudication, 2016). The following parts cover this case in detail. ASIC v Edwards (No 3) (2006) 57 ACSR 209 In this case, the proceedings were commenced against Malcolm Edwards, by the ASIC; the Supreme Court of New South Wales considered whether or not the director of the company, who has been engaged in the construction phase of the project, could be held liable for the insolvent trading done by the company (Allens Arthur Robinson, 2006). Edwards was the director of Murray River Limited (MRL), which was formerly known as Murray River Pty Limited, from July 1998 till March 2000. The company entered into a joint venture on December 22nd, 1998, regarding the development of an apartment hotel on the Murray Rivers lake shores at Mulwala. The ASIC contended that Edwards had breached section 588G of the Corporations Act, 2001, as he allowed the company to incur six distinct, as well as, separate debts, and had failed to prevent the company from incurring these debts (Allens Arthur Robinson, 2006). The circumstances under which Edwards did the trading for MRL attracted the operations of section 588G on six different occasions. With respect to each of these debts, the creditor was CJC or Colin Joss Co Pty Ltd, which was a building contractor. It was contended that these six debts were owed, due, as well as, to CJC by MRL as a result of the contract between these two or based upon the work done by CJC. The alleged debts were: April 27th 1999- $ 390,000 May 10th 1999- $ 635,000 May 20th 1999- $ 1,340,000 June 18th 1999- $ 859,370 July 22nd 1999- $ 183,889 September 24th 1999- $ 181,772 (Adjudication, 2016) ASIC made a case against the defendant that as he had failed to prevent the company MRL from incurring the debts a range of debts and by doing so, the defendant contravened the section 588G of the Corporations Act. ASIC had relied upon section 588G (2) which refers to any person or company contravening this section, by failing to prevent such trading which results in incurring of debts, and which results in insolvent trading, in cases where the individual is aware that such trading could result in insolvency at the time of incurring the debts or had grounds to believe the same (Adjudication, 2016). By incurring the debts at the time when he was the director of the company, Edwards had failed to follow this section (Castle, 2015). At these claims of ASIC, Edwards had contended that MRL was solvent at all the material times relied upon by the ASIC. Further, he had no reasonable belief, at all material times, that the company was solvent, or that it would become insolvent. And that he had reasonable grounds to expect the solvency, as well as, the continuance of solvency of MRL. Moreover, he had the reasonable grounds to believe, and actually did believe that MRL would be able to meet its obligations, as and when due, by relying upon the assets, as well as, resources that were out of the balance sheet of the company (Allens Arthur Robinson, 2006). Edwards also stated that the debts which had been alleged were neither due, nor payable as the conduct of CJC stopped them from the enforcement of any of the debts which were owed by MRL; that CJC had assumed the risk to continue working over the project; and that a breach of contract did not mean an inception of a debt to be incurred by MRL. Moreover, MRL had the right of indemnity even when the debt was incurred, from another organization for the debt. And since MRL was the beneficiary of the resultant construction trust, both the beneficial interest and the right of indemnity became an asset for MRL. Edwards also stated that he had genuine reasons to believe that the company would be able to meet its liabilities and debts by relying upon the resources which were outside its balance sheet (Adjudication, 2016). Taking help from the section 588H of the Corporations Act, which provides defense in such situations, Edward claimed that he had genuine reasons to believe at all the material times, and actually did believe that the reliable and competent individuals who were responsible for giving him the correct information regarding the solvency of MRL were fulfilling their responsibilities properly, and that he had relied on this very information to belie that the company would have remained solvent when the alleged debts were incurred (Adjudication, 2016). Upon being satisfied that Edwards had failed to prevent MRL from insolvent trading, by incurring several debts, the court made a declaration of contravention under section 1317E (1) (Justis One, 2016). Duties breached Section 588 G of the Corporations Act, 2001 contains the provisions regarding the duty of the directors to prevent insolvent trading by the company. When a person is a director of any company at such a time when the debt was incurred; and the company was insolvent at such time, or as a result of incurring the debt, becomes insolvent; and at such time, there was presence of reasonable grounds, to suspect that the company was insolvent, or that the result of such debt would be the insolvency of the company (Australasian Legal Information Institute, 2016). This section further states that by failing to prevent the incurring of such debt by the company, the director would have contravened this section, in case the director was aware about the grounds for suspecting at that time; or a reasonable person in the similar situation would have been so aware. Moreover, an offence is committed in case the failure to prevent the incurring of such debt by the company was due to some dishonesty (Australasian Legal Information Institute, 2016). Decision of the Court The court held that in order for ASIC to be successful in showing that 588G was contravened by Edwards, ASIC had to show that: Edwards was the director of MRL at the time the debts were incurred; MRL was either insolvent at the time of incurring the debt, or as a result of the debt, became insolvent; Reasonable grounds existed at the time of incurring this debt regarding MRL being insolvent or the probability of MRL becoming insolvent due to this debt; Edwards failed to prevent the company from incurring the debt; and Edwards was aware about such grounds, or a reasonable person would have been aware of such grounds, had such person been in position of Edwards in MRL (Adjudication, 2016). The court held that even after the ASIC could prove that the elements were present to establish that Edwards had breached section 588G of this act, he could not be held to have breached this section in case Edwards can successfully establish the defenses available under section 588H. So, if Edwards could establish that at the time of incurring of this debt, he had genuine reasons to believe or he actually believed that: A reliable and competent individual, who was someone other than Edwards, was responsible for providing the information to Edwards regarding the solvency of the company; and such other individual had fulfilled his responsibilities And that on the basis of such information, it was expected that the company would remain solvent, and was solvent at the time too, when the debts were incurred (Adjudication, 2016). Along with this, Edwards had to establish that he took all the necessary steps to prevent MRL from doing something which could be deemed as insolvent trading. To establish these points, the court viewed the actions of the person taken to prevent such insolvent trading and the result of such actions. The Court considered the applicability of elements of section 588G (1). The judges established that the debts which were incurred by the company and at the time which they were incurred, the defendant were undisputedly the director of the company in all of such occasions (Harris, 2008). And the judges successfully established that at each of these instances, the company was insolvent. This was done by considering the points raised by Edwards regarding outside sourcing and the condition of the balance sheet. They held that the requirement covered under the Corporations Act regarding the incurring of debt after the commencement of this act had also been met (Lhuede and Alderman, 2009). The judges also opined that the genuine reasons for suspecting the insolvency of MRL were present at that time (Chamberlains, 2016). Moreover, any other person, who was the director of MRL, in place of Edwards, would have failed to find any idea reading the presence of necessary money to repay the debts, which was done by Edwards. In the same manner, section 588 G (2) of this act was analyzed to have been breached by Edwards as he failed to prevent the company from insolvent trading, as required under the quoted section (Adjudication, 2016). And so, it could be clearly established that Edwards had breached section 588G of this act. The court acknowledged that Edwards had committed major violations of the act, and had acted in a dishonest manner (Australian Institute of Company Directors, 2014). Further, Edwards had allowed the innocent creditors, as per the court, to embark upon a course of conduct, which was disadvantageous for them, and was solely for the personal benefit of the director (BRI Ferrier, 2015). The judge described the conduct of Edwards as morally wrong, not straightforward, along with containing elements of moral turpitude, as well as, dishonesty (Lewis, 2010). The court held that MRL was insolvent at the time of when the work on the project began, and continued to remain insolvent after this project (Australasian Legal Information Institute, 2006). The court also held that Edwards was aware about the financial position of MRL, and knew that incurring these debts would result in continuance of insolvency of the company. Moreover, the court also concluded that there was a contravention of directors duty stated in section 588 G of the Corporations Act, 2001 (Australasian Legal Information Institute, 2005). As a penalty, Edwards was disqualified from being a director of any company, for 10 years (Mansor, 2011). Conclusion From the above analysis, it can be concluded that the directors duties are crucial for proper governance in any company. Any violation of these duties is harmful, not only for the company, but also for the breaching director. In the given case, Edwards, the director of MRL had failed to prevent the incurring of several debts by the company. Due to this, ASIC had initiated proceedings against Edwards. And the court, in these proceedings, held Edwards as guilty of contravention of directors duties and disqualified him from being the director in any company for a period of 10 years. References Adjudication. (2016) Australian Securities Investment Commission v Edwards [2005] NSWSC 831. [Online] Adjudication. Available from: https://www.adjudication.co.uk/archive/view/case/526/australian_securities_investment_commission_v_edwards_%5B2005%5D_nswsc_831 [Accessed on: 01/12/16] Allens Arthur Robinson. (2006) Annual Review of Insolvency Restructuring Law. [Online] Allens Arthur Robinson. Available from: https://law.unimelb.edu.au/__data/assets/pdf_file/0006/1709772/58-stevenwong_essay_6_May_20091.pdf [Accessed on: 01/12/16] Australasian Legal Information Institute. (2005) ASIC v Edwards [2005] NSWSC 831 (24 August 2005). [Online] Australasian Legal Information Institute. Available from: https://www.austlii.edu.au/au/cases/nsw/NSWSC/2005/831.html [Accessed on: 01/12/16] Australasian Legal Information Institute. (2006) ASIC v Edwards [2006] NSWSC 376 (5 May 2006). [Online] Australasian Legal Information Institute. Available from: https://www.austlii.edu.au/au/cases/nsw/NSWSC/2006/376.html [Accessed on: 01/12/16] Australasian Legal Information Institute. (2016) Corporations Act 2001 - Sect 588G. [Online] Australasian Legal Information Institute. Available from: https://www.austlii.edu.au/au/legis/cth/consol_act/ca2001172/s588g.html [Accessed on: 01/12/16] Australian Institute of Company Directors. (2014) The Honest and Reasonable Director Defence. [Online] Australian Institute of Company Directors. Available from: https://fsi.gov.au/files/2014/09/Australian_Institute_of_Company_Directors_Attachment_A.pdf [Accessed on: 01/12/16] Australian Institute of Company Directors. (2016) What are the duties of directors?. [Online] Australian Institute of Company Directors. Available from: https://www.companydirectors.com.au/membership/the-informed-director/what-are-the-general-duties-of-directors [Accessed on: 01/12/16] BRI Ferrier. (2015) Exoneration of directors from insolvent trading liability. [Online] BRI Ferrier. Available from: https://briferrier.com.au/news/exoneration-of-directors-from-insolvent-trading-liability [Accessed on: 01/12/16] Castle, T. (2015) Developments in insolvent trading law in 2015. [Online] Sparke Helmore Lawyers. Available from: https://www.sparke.com.au/insights/developments-in-insolvent-trading-law-in-2015/ [Accessed on: 01/12/16] Chamberlains SBR. (2016) Insolvent Trading A Directors Duty not to be in Breach. [Online] Chamberlains SBR. Available from: https://www.chamberlainssbr.com.au/PDF/Trade%20paper.pdf [Accessed on: 01/12/16] 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. [Online] Justis One. Available from: https://app.justis.com/case/asic-v-edwards/overview/c5Ctn4etm5Wca [Accessed on: 01/12/16] Lewis, P.J. (2010) Insolvent trading defences after Hall v Poolman. [Online] Thomson Reuters. Available from: https://sites.thomsonreuters.com.au/journals/files/2010/10/j04_v028_CSLJ_pt06_lewis.pdf [Accessed on: 01/12/16] Lhuede, M., and Alderman, P. (2009) The Director`s Duty to Prevent Insolvent Trading. [Online] Television Education Network. 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