Discuss about the Australian Legal and Investments Commission.
The present situation incorporates issue with respect to the recovery of amount from the directors of the company for the amount equivalent to the unsecured creditors. It is required to analyze whether the company was insolvent while incurring the value of debts to the unsecured creditors or whether the company has been in a temporary illiquidity for concluding negotiations.
As per the regulations of Corporation Act and Law under section 588G, directors of the company are responsible to prevent the insolvent trading. The regulations of Corporation Act provides that the directors of the company would held responsible for contravening the section if the directors are aware for the grounds that suspect the insolvency of the company (Asic.gov.au 2017). In addition, the directors are held responsible for contravening the regulations of section 588G if a reasonable person or concerned official in the similar situation would be aware of the insolvent trading. The regulation of the Corporation Act further provides that it is essential to test the solvency with respect to section 95A. As per the regulation, it is essential to measure the ability of the company to pay off the debt when they are due (Austlii.edu.au 2017).
Further, section 588H provides the regulations on proceedings required to consider for contravention of requirements of section 588G for contravention of debts. The section provides that the directors have reasonable grounds to claim the solvency of the company during the time company incurred debt. The legislation further provides that the directors of the company are entitled to demonstrate their exclusion from the significant matter that explains the chances of insolvency of the company due to substantial reasons. Moreover, it is the duty of the directors to take reasonable steps to incur debt if the director is of the view of insolvent circumstances.
Considering the situation in the present case, it can be said that the Law company incurred debts to the unsecured creditors during the time of temporary illiquidity. The directors believed on the reasonable grounds that the company would be able to conclude the negotiations for purchasing the timber products. It was contended that the process of negotiation would increase in the substantial income of the company as well as the realization of the assets would be considered within 90 days period. As per the rulings in case of Tourprint v Bott (1999) NSWSC 581, it was contended that the directors failed to provide appropriate information for solvency position. It was also noted that the directors of the company failed to keep the financial record resulting in failure of identifying the insolvency of the company and therefore, directors held to breach the regulations of section 588G.
Additionally, in case of Miller v Metropolitan Fire Systems Pty Ltd (1997) 23 ACSR 699, the court held that the director of the company failed to prevent the company from incurring debt. Further, the director also contravened the provision of section 588 because the concerned person in the same position was failed to disclose the actual financial status of the company (Aier, Chen and Pevzner 2014). Similarly, in the present case, directors of Finished Timber Company, Kevin and Robert claimed that the debt was not incurred during the period of insolvency but it was incurred it at the time of temporary illiquidity. However, it has been observed that during the time of incurring debt, the directors of the company failed to provide appropriate disclosures for substantial income and asset values.
Therefore, it can be concluded that Kelvin and Robert contravened the regulations of sections 588G and 588H of the Corporations Act since they failed to disclose the financial information. Accordingly, the directors are liable to pay the equivalent amount to the unsecured directors based on the time of debts incurred.
The given case involves an issue with respect to the fiduciary duty of the directors, Ian and Mike towards the company Windmills Pty Limited. It is required to analyze whether the director of the company as minority shareholder is liable to perform duties as per the legislations of Corporations Act.
According to the regulations of Corporations Act 2001, directors of the Law company are required to perform the business activities with due care and diligence as per the requirements of section 180. The directors are required to perform business functions in good faith together by using the proper information so that the directors do not gain undue advantage for themselves. The regulations of Corporation Act further provide the duties of director to minority shareholder, which includes performance to avoid fraud, breach of regulations and bad faith (Asic.gov.au 2017). It is essential for the directors to provide reasonable notice to the minority shareholders for their participation in the meetings of shareholders. Further, the directors are required to provide rights to the shareholders to inspect the company’s financial records.
In the present situation, it has been noted that the business deal for asset purchase was not disclosed to Mike by Ian who has been a major shareholder in the company. Further, it was noted that the Ian sold the assets at larger price, which was not disclosed to Mike during the period of business activities. In case of Sinclair Oil Corp v Levien, it was held that the director of the company did not act fairly with respect to the parent company’s business transactions (Strine Jr 2014). The director did not consider the minority shareholders for the payment of dividend and breached the contract with party. Hence, the director was held for breaching the regulations of sections 180 under Corporation Act 2001 and did not perform duties to the rights of the minority shareholders.
Therefore, it can be concluded that Ian in the present situation was a major shareholder and was liable to perform the duties in terms of good faith and fair rights to the minority shareholders. Ian did not disclose the agreement details for purchase of assets to Mike and sold the assets at higher price. It was held that Ian failed to perform his duties in reasonable manner and should be held liable to pay claims to Mike.
Aier, J.K., Chen, L. and Pevzner, M., 2014. Debtholders’ demand for conservatism: Evidence from changes in directors’ fiduciary duties. Journal of Accounting Research, 52(5), pp.993-1027.
Asic.gov.au. 2017. ASIC Home | ASIC - Australian Securities and Investments Commission. [online] Available at: https://asic.gov.au/ [Accessed 16 Apr. 2017].
Austlii.edu.au. 2017. Australasian Legal Information Institute (AustLII). [online] Available at: https://www.austlii.edu.au [Accessed 14 Apr. 2017].
Strine Jr, L.E., 2014. Making It Easier for Directors to Do the Right Thing. Harv. Bus. L. Rev., 4, p.235.