Breach Of Directors Duty And Insolvent Trading In Australian Securities And Investments Commission

Discuss about the Australian Securities And Investments Commission.

The first issue which has been identified in the given situation is in relation to breach of directors duty by Bruce (section 180-184 and 191 of the Corporation Act 2001 (Cth)(the Act))

The second issue which has been identified in the given situation is the breach of insolvent trading provisions by the Ninja Pty Ltd (Section 588G of the Act)

The third issue which has been identified in relation to the case study is that of a failure to maintain proper financial records

It has the duty of a person who is an officer or director of an organization as per the provisions of section 9 of the Act to abide by the obligations imposed on them by the Act. These obligations are provided through various sections of the Act. The sections which would be needed to be analyzed in relation to the first issue are section 180-184 and 191 of the Act.

It has been provided by the provisions of section 180 of the Act that a person who is an officer or director of an organization as per the provisions of section 9 has the liability of discharging his obligations in a way which depicts due care and diligence. There is a parameter or a test which has been provided by the wordings of the section which is also similar to the objective test at common law. The test stipulates that the best way of analyzing whether a person has acted diligently and carefully in relation to his duties by comparing the actions of such person in the same situation to a reasonable person or director. Where such actions would be done by the reasonable person then the test under this section is satisfied.

In section 181 the Act states that it is the duty of a director or officer of an organization to discharge his obligation in the organization’s best interest, proper purpose and good faith.  This signifies that a person in control of an organization must not have mala fide intentions in relation to the company and his actions must depict that he is working for the interest of the company and not for personal interest.

It has been provided by the Act through the provisions of section 182 that a person who is an officer or director of the company have the liability of not misusing the position held by them in the company to the loss of the company and for personal gains. It has been further provided by the provisions of section 183 of the Act that a person who is an officer or director of the company have the liability of not misusing the information which they possesses in relation to the company to the loss of the company and for personal gains.

Issue 2

Another obligation which has been imposed on the directors and officers of a company is through the provisions of Section 191 of the Act. The provisions impose a liability of the directors and officers to disclose any matter where a martial personal interest is involved to the directors of the company in situation of conflict of interest.

In the case of Australian Securities and Investments Commission v Cassimatis (No 8) [2016] FCA 1023 it had been stated by the court that even if the directors of the company are the only shareholders of the company they can be held liable for the breach of section 180 of the Act.  In this case the directors of the company were the only shareholders of the company had been held liable for the breach of section 180 of the CA as they had provided reckless financial advice to the clients which led to the loss of reputation to the company.

It has been provided in the given situation that Bruce and Lee are the directors of the company Ninja.  The managing director of the company is Bruce who had been working as senior accountant previously for a large company. All issues in relation to the accounting of the company is managed by Bruce.  

The case study states that Bruce has failed to pay Supply co who are the suppliers of Ninja. In the given situation it can be stated that the provisions of section 180 of The Act has been violated by him. This is because Bruce as a director of Ninja as per the provisions of section 9 has the liability of discharging his obligations in a way which depicts due care and diligence. There is a parameter or a test which has been provided by the wordings of the section which is also similar to the objective test at common law. Through the application of this test it can be stated that Bruce has not acted diligently and carefully in relation to his duties as when his actions in the same situation are compared to a reasonable person or director the reasonable person would have not ignored payment which would lead to the loss of reputation for the company   and thus the test under this section is not satisfied.  The breach of the duty can be further established through the application of the principles provided in the case of ASIC v Cassimatis as Bruce along with Lee is the only shareholder of the company as well as the director and his actions have caused loss or reputation to Ninja in the same way as in this case.

Issue 3

In the given situation under the provisions of section 181 of the Act Bruce has the duty of discharging his obligation in Ninja’s  best interest, proper purpose and good faith.  This signifies that he must not have mala fide intentions in relation to the company and his actions must depict that he is working for the interest of the company and not for personal interest. However it is clear that as he has purchased luxury cars and thrown a lavish party he is not working for the best interest of Ninja and has mala fide intention to defrauding the company. Thus the provisions of section 181 have also been violated by Bruce.

Bruce is also imposed with obligations under the provisions of Section 182 and Section 183 of the Act. according to the obligation Bruce must not misuse the position held by him in Ninja to the loss of the company and for personal gains. In addition he must also not misuse the information held by him in the Ninja to the loss of the company and for personal gains. However he has made personal gains by purchasing a luxury cars and indulging into various other transactions through the use of position and information gained by Ninja and caused loss to the company. Thus he has violated Section 182 and Section 183 of the Act.

It can be depicted form the facts provide through the case study that Bruce has indulged into such action in a negligent and reckless manner. Thus the provisions of section 184 would be applicable and his breach of section 180-183 would be an offence under the criminal code section 6.1.

Under this section it was the duty of Bruce to disclose any matter where a martial personal interest is involved to the directors of the Ninja in situation of conflict of interest. Thus in this situation he had to make a disclosure to Lee. However he had provided wring information to Lee in the situation and thus this section has also been violated by Bruce

Conclusion

Bruce is liable for the breach of section 180-184 of the Act along with section 191.

Section 588G of the Act has the purpose of providing rules in relation to insolvent trading by the directors of a company.  It has been provided through the Act that the section is applicable when a person who is a directors of a company gets a debts and the organization at that time is insolvent or because of incurring the debt the company becomes insolvent or incurs debts at the time including the present debt.  Further there were reasonable causes to believe that the company is insolvent or may become insolvent or there is suspicion that the company may become insolvent because of incurring such debt the section is applicable.  

Rule 1

As per subsection 588G (2) a person is held to have violated the provisions under this section if he fails to prevent an organization from incurring the debt and was aware at the time when the debt had been incurred that there were such reasonable causes or suspicion which would have been aware of by a reasonable person in the same situation.

Further under the provisions of subsection 588G (3) of the Act that a person is held to have committed an offence when a particular debt has been incurred by the company at a specific time and the person was the director at that time and the company becomes insolvent or because of incurring the debt the company becomes insolvent or incurs debts at the time including the present debt and there were reasonable causes to believe that the company is insolvent or may become insolvent or there is suspicion that the company may become insolvent because of incurring such debt. The failure of the person to prevent the company from getting the debt was dishonest.

On the other hand it has been provided through the provisions of section 588H of the Act that a person can claim a defense in relation to the above discussed provisions if it can be provided by him that at the time the debt had been incurred he or she had reasonable cause to believe or knew that the company is solvent and would also be solvent if the debt has been incurred by the company. It is also defense if a person can provide that another reliable and competent person had the responsibility of providing him or her accurate and appropriate information in relation to whether or not the organization is solvent. The section is only applicable where the person had been fulfilling his or her responsibility and had reasonably expected based on the information provided by the other person that the company is solvent and would also be solvent of the debt is incurred.

It has been provided by the case study that Ninja has been guilty of not being able to pay its creditors. It is also provide through the facts that Bruce was continuing to use the credit card of the company when he had the knowledge that the company is facing financial difficulties. He also purchased cars worth $110000 when the company was in financial difficulties. A lavish party had also been also been thrown in circumstances where the credit limit of the company has already been crossed. Thus it can be stated that provisions of section 588(g)(1) has been violated by Ninja as it prohibits insolvent trading. Further Lee and Bruce would both be liable under section 588G (2) of the Act as they are the directors of Ninja. Ninja was not allowed to get into a transaction which gets it a debt and at that time Ninja  is insolvent or because of incurring the debt Ninja becomes insolvent or incurs debts at the time including the present debt.  Further there were reasonable causes to believe that Ninja  is insolvent or may become insolvent or there is suspicion that Ninja may become insolvent because of incurring such debt the section is applicable.  The responsibility of preventing insolent trading is on both directors of the company.

Application

However through the defense provided under the provision of section 588H of the Act Lee can escape this liability. This is because Lee can provide that another reliable and competent person who is Bruce had the responsibility of providing Lee accurate and appropriate information in relation to whether or not the Ninja is solvent. The section would be applicable as Lee had been fulfilling his responsibility and had reasonably expected based on the information provided by Bruce that the company is solvent and would also be solvent of the debt is incurred. Further Bruce has violated section 588G (3) as his actions were of a dishonest nature.

Conclusion

Ninja has violated section 588G of the Act. However only Bruce is to be held liable as Lee can claim a defense under section 588H of the Act. Bruce has violated section 588G (2) and (3).

The Act also imposes an obligation on registered companies to keep and maintain financial recodes. It has been provided through the provisions of section 286 of the Act that it is the obligation of a company to maintain financial records in a written manner which accurately record and explain the performance, transactions and financial position of the company and would also ensure that fair and true financial statements can been prepared by based on them when the records are audited. Further it has been provided through the provisions of subsection 286(2) that financial records have to be retained by the company for a period of seven years. It is further provided by the provisions of the section that where subsection (1) and (2) is violated it is a strict liability offence.

It has been provided through the facts of the case study that Bruce did not maintain financial records of Ninja in a manner provide under section 286 of the Act. Thus ninja has violated the provisions of this section.

Conclusion

Ninja and its directors are liable for not complying with section 286 of the Act

The fourth issue which have been identified in the given situation is of determining the liability for the violation of the above discussed sections)

It has been provided through the provisions of section 180-183 of the CA that where the provisions of these sections have been violated the alleged person is liable to a civil penalty provisions under the rules of section 1317E of the Act.

According to the provisions of section 1317E of the Act a person who has been found to have contravened the civil penalty provisions may be subjected to the financial penalty as well as ban from managing the affairs of any corporation in Australia in the future. Under this section the court has the duty of making a declaration of contravention made by the alleged person. After the contravention has been made by the court a pecuniary penalty order may been asked from by the ASIC under provisions of section 1317G and/or a disqualification from management order under the provisions of section 206C of the Act.

Rule 2

Under the provisions of section 1317G of the Act it has been stated that the court has the right to impose on a pecuniary penalty on a person of up to $200,000 to be paid to the commonwealth. This is a maximum penalty which may be imposed on a person by the court under the Act.

Under the provisions of section 206C the Act the court has the power to ban or disqualify a person from managing a corporation. The disqualification can be for a period which is deemed appropriate by the court where the court has satisfaction in relation to the fact that the disqualification is justified.  The court may rely upon the conduct of the person in to determine whether the disqualification is justified or not.

In the case of ASIC v Lindberg [2012] VSC 332 the court imposed on the director who had been found to have contravened the civil penalty provisions of the Act a pecuniary penalty worth $100000 and a disqualification for a period of two years as asked by the ASIC.  Further in the case of Australian Securities and Investments Commission v Sino Australia Oil and Gas Limited (in liq) [2016] FCA 934 also the court imposed a penalty on the directors and well as disqualified him for managing corporation in Australia for a period of 20 years.

Where the provisions of section 588G of Act is violated the director who had been found to breach the provisions of the section is personally liable to the losses which have been caused to the creditors of the company. There are both criminal and civil sanctions for the purpose of violation of section 588G of Act. The court may lift the corporate veil in situation  where the section has been violated as provided in the case of Edwards v Australian Securities and Investments Commission (ASIC) (2009) 264 ALR 723. The provisions of section 1317E can also be applied by the courts for the breach of this section.  Orders under section 588J can also be made by the court in this situation where by the directors are liable to directly compensate the company because of the debt incurred by it. The directors may also be asked to directly pay compensation to the person who has suffered significant losses as the company has become insolvent.

As per the above discussed ruled Bruce has violated civil penalty provisions for breaching section 180-183 and 191 of and thus provisions of section 1317E would apply. Under this section Bruce would be subjected to the financial penalty as well as ban from managing the affairs of any corporation in Australia in the future.

The financial penalty to be imposed on Bruce would be maximum of $200000 under section 1317G of the Act. Further the ban which would be imposed would be decided by the court.

In relation to insolvent trading under section 588G the court will make Bruce liable for civil penalty provision a well as criminal penalty. In addition the court may also pierce the corporate veil and make him personally liable for the losses which have been incurred by the creditors.

Conclusion

The above remedies are available in the present situation. Bruce is liable under section 1317 E of the Act and also under section 588G of the Act. Bruce is also liable under the criminal code section 6.1.

ASIC v Lindberg [2012] VSC 332

Australian Securities and Investments Commission v Cassimatis (No 8) [2016] FCA 1023

Australian Securities and Investments Commission v Sino Australia Oil and Gas Limited (in liq) [2016] FCA 934

Corporation Act 2001 (Cth)

 Edwards v Australian Securities and Investments Commission (ASIC) (2009) 264 ALR 723