Insolvency Trading by Directors - Assignment Example

Insolvency Trading by Directors Question Directors’ duty to prevent insolvent trading As per section 588 G of the Corporation Law 2001, the duties of the director of the company requires him to prevent the company from getting into any debt situation if 1. The said company is by now insolvent at the time when the debt is being incurred 2. Or if the debt is incurred or a range of such debts are incurred, the company shall run into a state of insolvency. However, when the debt is being incurred, the suspicion can be formed with reasonable grounds for suspecting the company to be insolvent or shall become insolvent if the debt is incurred (Ciro and Symes, 2009). Such a duty is applicable to the directors who have been appointed to such a position or to any other alternate director who is appointed to act in such a position. Such duty is also applicable to those persons who have not been validly or formally appointed as the directors of the company but act as a director in its position and the company director’s acts in accordance of his instructions and wishes. For the purpose of adhering to their duties, the directors must remain informed of the financial position of their company and also ensure that proper and updated financial records are maintained. Such analysis also includes the assessment of the ability of the company to collect debts pay off the creditors. The director should make appropriate investigation for any financial difficulties that the company might be undergoing. This is important because the company might run the risk of running into insolvency as a result of incurring huge debts. Additionally, the director’s responsibility includes seeking advice on matters that relate to suspicion of company’s financial position and such advice should come from a knowledgeable and qualified person deemed suitable for consultation. Lastly, the directors are expected to act in a timely fashion so as to prevent fraudulent financial transactions, pull company out of financial difficulties and prevent insolvency based on advices sought from consultants. Lifting of the corporate veil for insolvent trading The veil of incorporation states that the company is a separate and distinct legal entity which is independent of the member who come together to form it and it includes the independence from the directors of the company as well. When the company is registered, it becomes a separate person with a distinct legal identity and is assumed to have legal capacities and the power of a separate individual and also endowed with the powers of a body corporate. Piercing of the veil occurs when the company’s liabilities are being imposed on one or more of the company legal persons which includes directors and the key shareholders of the body corporate. Such liabilities are sought from these people because they have been held responsible for causing the company to act in a manner through their right to control the actions of the company. The liabilities are imposed on the personal front of the directors with the justification that they have been solely and most importantly responsible for wrongdoings. Additionally, their actions are detrimental for the company and its corporate stakeholders like the creditors (Pearson, 2009). The position of the directors within the company provides them with the power to prevent any insolvent trading and transactions that shall prevent the employees of their company from getting what their entitlements are and a whole lot of corporate actions. Circumstances and consequences of lifting of the incorporation veil in the event of insolvent trading by the directors The circumstances in which the corporate veil of a body corporate gets lifted have been recognized by the Australian law as a violation of the Act 588G where, in the event the director fails to avoid debt circumstances for the company, he has breached section 588 G(2) (Tomasic, Bottomley and McQueen, 2002). He is held responsible and the corporate veil is lifted when 1. The director is found to be aware of the grounds that the company is insolvent or shall becomes insolvent when such debts are incurred at that time 2. A reasonable individual is suspected to be aware who is in a similar position to know about the company and the company position. This implies that it is not necessary that the director is aware of the company’s insolvency or potential insolvency. He or she shall be deemed responsible even if there are reasonable grounds and facts that point towards potential insolvency or complete insolvency of the company at the time of incurring the debt. This can also includes the facts and evidences that require that the director should have been aware of such a situation. As a consequence of being held responsible, the directors might have to face the following penalties: Criminal offence under section 588G (3) The section 588G (3) contravenes a criminal offence for such acts of dishonesty on the part f the director of the company. When a director is found guilty, and suspected the company for being insolvent or acted in a dishonest manner for preventing the company from incurring the debt. Here, the term dishonesty is being clarified as a known intention and the criminal proceedings under section 1317FA shall undertake only when it has been fully identified that the director has permitted such insolvent trading knowingly (Cassidy, 2006). Civil Penalty As per section 588G the civil provisions under section 1317D, the penalty may be imposed by 1. ASIC 2. A delegate of the Commissions 3. A person authorized by the Minister in writing. In addition to the court declaration of the provision has been contravened, the order shall prohibit the guilty from managing any body corporate for a designated time period and also require him to furnish a penalty of $200,000 for the Commonwealth pecuniary penalty under section 1317EA (Macmilan, 2003). Such application for civil contravention can be made at any point of time within 6 years of the actual contravention. Question 2 The issue presented within this question is to present the case where there has been a breach of duties of the directors in context with the case of insolvent trading. The question also seeks presence of any defenses for the directors in such an event. Apart from these, the question seeks information about the penalties that can be levied upon the directors for being guilty and having breached the provisions of insolvent trading under the Corporations Acts 2001. As per Section 588 G of the Corporation Act of 2001 which deals with the duties of directors for prevention of insolvent trading, such duty of the director is only applicable to the individual who is the director of the company, in this case OHS, at the time when the debt is being incurred by the company. The provisions of such duties as expected off the director are present within this act. Pursuant to the stated provisions, the duty shall be applicable in cases where the company has become insolvent at the time or through the acquisition process in a debt position that includes the said debt or becomes insolvent in the process of acquiring the liability or debts. Ying, who is also the nominated director of the company OHS Solutions jointly formed by Emma, Satish and Des, by the Guarantor company is led to believe that the company is being managed very poorly. According to her views, the business does have the potential to grow and its parent company, Support Pty. Ltd shall buy off the company in order to gain more success. For the purpose, it is desired that a careful analysis of the company’s position and future business scope is analyzed before taking further actions. A careful analysis of the situation presents that none of the company directors show interest in fulfillment of their legal duties as a director. The initial work done by the directors displays that all directors are acting in breach of their responsibilities as a company director towards their stakeholders and this also includes Ying. Ying is in an apparent vulnerable position and is not being able to stop the company from trading despite it being in an insolvency state. Ying is the nominated non executive director and the responsibilities of the director need to be fulfilled by him all the same. He is likened to the position of a director of the company as per Australian Corporate Law 2001, section 588 G. his actions should work in favor of the company rather than protecting self interests. Emma is the finance director of the company with equal shareholding as the other three partners of the firm. It is required off Emma as one of the company directors that she should aware to furnish the financial data of the company updated and maintained. Additionally it is also required that the finance director discharges his duty of maintaining proper financial records. The very principal of being a director requires off all the four directors to have ready access to financial data which is reliable and updated as and when required and hence all four directors including Emma have breached their duties as a director of the company, OHS solutions Pvt Ltd. Emma’s reliance on subordinates for critical financial information is also not justified for the directorial position where no excuse is provided for relying on others for information on financial solvency of the company. Additionally, it is known to Emma that the company owes the amount to Troubleshooter. The prime aim of its engagement with Troubleshooter was to resolve its IT issues. Without knowing the financial facts despite being in a position to know about the payments due to Trouble shooters, Mr. Dev signs contracts with Promotion Plus for which the company shall have to raise extra debt of $1000 because it has no money to pay for this contract. Such raising of debt is an act of promoting insolvency of the company despite knowing the facts and shall be deemed to be a criminal offence under Section 588(3). Des is the managing director and is the expert on occupational health and services. Being in a position he is, it is expected that he discharges his duties as a director and has access to all relevant financial data. In addition to this he should also be able to tell the correct position of the company to pay off its debts and to collect its money at any point in time. The director is also expected to interrogate about the financial difficulties of the company and find ways to address the difficulties so as to bring back the company to a stable position. Apart from this, the director is also expected to seek third party advice when he came to know that the company runs into huge debts with the Troubleshooters Pvt Ltd. This is expected off the directors when he needs consultation of a knowledgeable person for the discharge of his duties. Being the managing directors, Des does not do any of the above and has been loosely holding its directorship. He is not acting in a timely fashion for preventing its company from running into insolvency. Hence the director can be rightfully charged for insolvent trading by the director. Satish, who is the manager for IT operations of the business with relevant expertise in the area also, does not take apparent interest in the financial position of the firm. His review of the financial position was not done for the past months of company operations. Additionally, it is assumed that the decisions pertaining to Troubleshooters were not well communicated by Satish to other directors. The problem with two complaining websites might have been resolved but the overall situation was not under control. Understanding the facts above presented well, it is suggested that Mr. Ying tries to stop and take back the deal from Promotions plus Pvt Ltd for advertising their website and also gaining access to the OHS conference for winning its market position back. Withdrawal of such amount of $10000 from the deal might be deemed wrong for company’s future but it shall prevent the company from entering into further debt that shall put it into an insolvency position. Hence the director shall be saved from penalizations under the Australian Corporate Law 2001 for breach of director’s duty for insolvent trading. Failing to do this shall invite charges on the personal property of the individual directors for repayment to the different stakeholders and thereby lift the corporate veil. It is being clearly understood that the managing director are relying on other directors who have been designated with the particular department of finance and IT for all kinds of related information. It is suggested that the managing director takes active part in the affairs of the company and does a monthly review of the financial position of the company. This shall include a review of the company’s debt positions, its profitability, it ability to pay off its debts that might arise in near future and the realistic value of its assets and liabilities. The managing director should also ensure that the IT information presented by the other IT director; Satish is furnished with proper documents and is not taken to be true based on a sweeping remark. Additionally, it is required that Satish is made aware of the present financial ability of the business and also the critical nature that such financial position shall play in company decision making. Ying should make sure that the above suggestions are implemented within the company so that it remains operational and the stake of Support Pvt Ltd is safeguarded. The suggestion that follows the measures taken above for Ying is that that it should declare the company as an insolvent firm and takeover the operations of the firm. This shall be done only after Ying stops further debt sourcing and all deals that have been made with Promotions Plus Pvt Ltd so that the company is saved from charges of insolvent trading by directors. Once the company is declared insolvent, Ying’s firm, Support Private Limited can offer to take over the operations and assets of the company and use the goodwill of Support Pvt Ltd. to win back the clients of OHS solutions private limited. Ying shall have to pay to the extent to which he acts as a guarantor to OHS Solutions which amounts to $50,000 in the event of declaring the company as insolvent. The takeover shall benefit him with the business of a company and its existing clients. Additionally, Ying shall also be saved from any civil charges for insolvency trading by directors if the company is charged with it in the event of no corrective measure taken by the directors. The civil fines invite a penalty of $200,000. It also protects Ying from any criminal charges that might be levied when found guilty of insolvency trading and lifting of the corporate veil. Reference List Cassidy, J., 2006. Concise Corporations Law. New South Wales: The Federation Press. Ciro, T. and Symes, C., 2009. Corporation Law: In Principal. Brisbane: Thomson Reuters Australia. Macmilan, F., 2003. International Corporate Law, Volume 2. Oxford: Hart Publishing. Pearson, G. 2009. Financial Services Law and Compliance in Australia. Cambridge: Cambridge University Press. Tomasic, R., Bottomley, S. and McQueen, R., 2002. Corporations Law in Australia. New South Wales: The Federation Press. Read More