Australian Law - Shifty Seller Pty Ltd - Assignment Example

Name Tutor Course Date Company Law Question a Issue The issue is whether Max can be held liable for the unpaid debt of shifty Seller Pty Ltd. This is after Max as a director ordered on credit steel cables from Smart Engineering Pty Ltd. Shifty Seller Pty Ltd later went into liquidation without paying for the steel cables. Max was also known as a bad credit risk in the industry including by Alex of Smart Engineering Pty Ltd who accepted the credit. Rules In Australia, the Corporations Act 2001 (Cth) is the law that is responsible for the operations of companies as well as the duty of the directors1. According to section 57A, a corporation may sue or be sued. A corporation also has the right to hold property. This means that a company is a legal person and hence making it a different entity from the owners as well as the directors2. According to section 124, a company has the legal powers and capacity of an individual. A director of a company is required to discharge their duties with care and diligence in accordance with section 180(1). Section 184 requires the directors to act in good faith when performing their duties. Section 8 gives a company the power to borrow loans for the purposes of financing its operations. According to section126 (1), an individual can be appointed by a company to act on its behalf. Any person who is acting on behalf of the company is considered an agent of the company. A director has the duty of preventing insolvent trading by the company in accordance with section 588G. If a civil penalty is applied in accordance with section 588J, a director may be ordered to pay the debt incurred by the company as a result of their actions. Application Max placed the order for the steel cables and it was accepted by Alex. Max was carrying out his duties in accordance to section 126 (1) as he was acting on behalf of the company. Max was known in the industry as being a credit risk. This is an indication that he may not have been acting in good faith in accordance with section 184. The company has the powers to take loans and credits in order to carry out its operations and Max was therefore not in contravention with section 8 and 126(1). Section 57A indicates that a company is a separate entity and it is a legal person. This indicates that Max although acting on behalf of the company, it is the company that incurred the debt. In the case of The King v Portus, the court ruled that a company is a distinct person from its shareholders and the shareholders cannot be liable for the debts of the company3. However, the company cannot be used by directors to evade the law. Max was responsible for causing the debt and hence failed to prevent insolvent trading in accordance to section 588G. Conclusion Max is liable for the unpaid debt in accordance to section 588J as he caused the debt in contravention to section 588G. Since he was well known bad credit risk he was hiding under the corporate veil. Max contributed to the insolvency of his company and is therefore liable. Question b Issue The issue is whether Betty can be liable for repayment of $ 500,000 loan from Eastpac Bank Limited. Betty is a non-executive director of Smart Engineering Pty Ltd and was responsible for signing the bank loan document in her capacity as the director of the company. The company however posted poor performance and it has made losses for 6 months. Rule According to section 181(1) (a), a director of the corporation must exercise their powers and discharge their duties in good faith and in the best interest of the company. A civil penalty applied for any director who contravenes this section. According to section 182(b), the directors are not supposed to use their positions to cause detriment to the corporation. The directors are required to use their position to advance the interest and growth of the corporation. A director is supposed to rely on the information that has been provided by the experts or profession while carrying out their duties4. This is in accordance to section 189(a). However, the reliance has to be in good faith in accordance to section 189(b). According to section 198A, the business of a company is supposed to be managed under the direction of the directors. According to section 8, the company can borrow money from the banks or other financial organizations for the purposes of funding its operations. Section 588H (2) a director may not be held liable for a debt if they had adequate reasons to believe that the company was solvent at the time the debt occurred. A director may not be liable if they received information from a reliable person. Application The actions of Betty were carried out in good faith in accordance to section 181(1) (a). The loan was supposed to help the company with its expansion plans. This is also an indication that Betty though skeptical of the plan was acting for the best interest of the company. Betty has a lot of confidence in the potential of the Chinese market as other companies had performed. The actions of Betty were in no way for the purposes of causing any form of detriment to the company. She signed from the loan after obtaining information from Alex about the potential of the Chinese market. Betty acted in accordance with section 588H (2) when signing for the loan. In the case of ASIC v Plymn, the Supreme Court found that a non-executive director had failed to prevent the company from incurring debts when it was insolvent5. The director had directors had no defence as outlined in section 588H. There has been no contravention of the Corporations Act 2001 on the part of Betty. Conclusion Betty cannot be liable of the repayment of the bank loan as she signed for the bank loan documents after obtaining information from Alex with regards to the potential of the Chinese market. Her actions were in good faith and she was acting for the best interest of the company. The defence for Betty is under section 588H (2). Question c Issue The issue is whether Betty and Alex have breached any duty to Smart Engineering Pty Ltd. This is after Betty signed the bank documents for the loan after it was borrowed on behalf of the company by Alex. On the other hand, Alex also accepted a large order to supply steel cables on credit. Rule According to section 180(2), the directors are supposed to make business judgment in good faith and for a proper purpose. The directors are not supposed to have material; or personal interest in the subject matter of the judgment. It is also the duty of the directors to inform themselves reasonably about the subject matter to the extent that they believe is reasonable6. According to section 180(3), business judgment means the decision to take or not to take action in respect to a matter. Section 183 forbids the directors from using information for their own personal benefits. According to section 184(1), the directors commit an offense if they act recklessly or are intentionally dishonest. The directors are also required to use their powers for a proper purpose. A director may be in breach of duty if they fail to exercise their powers in accordance with the provision of the Corporations ACT 2001 (Cth). Application Alex borrowed the loan on behalf of the company for the purposes of exploiting and expanding the business to China. This is an indication that he was using his powers for a proper purpose. Betty also supported the idea for the best interest of the company as they thought that the money would enable the company to exploit the opportunities in the Chinese market. The Federal Court of Australia upheld that the directors have the duty of acting in the best interest of the company in the case of Links Golf Tasmania Pty Ltd v Sattler7. Alex and Betty were not intentionally dishonest in any way while carrying out their duties as directors of the company. In the case of ASIC v Healey, the directors were found guilty of intentional dishonest after they provided false information with regards to the accounts of the company8. In the process of carrying out their duties, the directors did not act a reckless manner. The judgments that were made by Alex and Betty were based on facts. Section 183 was not breached by Alex and Betty when the bank loan was taken for the purposes of expanding the business operation of the company. Conclusion Alex and Betty did not breach any duty owed to Smart Engineering. Instead all their actions were aimed at ensuring that the company is successful. Alex and Betty did not contravene the duties of the directors as outlined in the Corporations Act 2001 (Cth). Betty and Alex cannot be held liable for the financial problems that were later faced by the company. References The King v Portus [1949] 79 CLR 42. ASIC v Plymn, [2003] 46 ACSR 126. Corporation Act 2001 (Cth). ASIC v Healey [2011] FCA 717. Links Golf Tasmania Pty Ltd v Sattler [2012] FCA 634. Links Golf Tasmania Pty Ltd v Sattler [2012] FCA 634Ciro, T. and Symes, C. (2013). Corporations Law In Principle, 9th ed. Thomson Reuters. Austin, P. and Ramsay, I. (2012). Ford’s Principles of Corporations Law, 15 ed. LexisNexis. Lipton, P. and Herzberg, A. (2014). Understanding Company Law, 17 ed. Lawbook Co. Read More