UTS:Law Assignment Cover Sheet for Online Submissions

Instructions for students:

 Please complete and include this cover sheet when submitting online assignment.
 The cover sheet should become page 1 of your assignment – do NOT submit this
coversheet as a separate document to your assignment.
 Please note that by submitting this form you are agreeing to the following ACADEMIC
HONESTY DECLARATION:

ACADEMIC HONESTY DECLARATION

 I confirm that I am aware of the University rules regarding plagiarism and academic
misconduct.
 I confirm that this assignment is entirely my own work and I have not previously
submitted any part of it for assessment at UTS or any other institution.
 I confirm that I have read and understood the current version of the UTS:Law Guide
to Written Communication.

STUDENT DETAILS (to be completed by student)

Student Number: 13150925

Family Name: Nguyen

Given Name(s): Thi Xuan Quynh

Subject Number: 79014

Subject Name: Applied Company Law

Subject Coordinator: Catherine Robinson

Word Count: 2516 Date of Submission:

UTS: LAW Version 1 February 2020

Insolvent trading
Legal Issue
The issue is whether Green Pod Pty Ltd (GP) is insolvent
Rule
The insolvent trading under s95A CA indicates a legal person (individual or company) if
insolvent, when the company is unable to pay the debts become due
Application
Regarding ASIC v Plymin (2003) which contains the indicators of insolvency, GP Pty Ltd is
insolvent in this situation. By mentioned these following indicators

 Outstanding rent
 Cost for employees of GA for GP work
 Certain other miscellaneous charges
 GP has not lodged its tax return on time 2018/2019

GP Pty Ltd failed to make the payments and pay the wage for its employees; moreover, the
company also delayed in paying the tax for the previous financial year.

Conclusion
In this situation, the answer for the legal issue is that GP Pty Ltd is insolvent.

Director 1: Mack
Fact
Mack is the sole director of Green Architect Pty Ltd (GA) and he also the director of GP Pty
Ltd
Issues
Has Mark breached section 180?
Mack is the sole director of GA Pty Ltd and GP Pty Ltd, by the facts supports that he put a lot
of effort into the GP Pty Ltd rather than the GA Pty Ltd. He actively manages the GP Pty Ltd.
and tries to expand the business for this company. A person can also be a director of one or
more company but he or she needs to be put the same effort into the businesses of those. In
this circumstance, the assumption can be made is that Mark does not exercise the duty of care
and diligent for GA company.
However, when releasing the Green Pods, the company issue misleading information about
the functions of the products. It can be considered as the marketing ploy of the company but
the statement with the flawless products seems to be intentionally giving the false statement.
The relevant case is James Hardies Case, the company issued a misleading statement to the
ASX to attract more public attention. The court stated that the directors have breached the
duty of care and diligence under section 180(1). Directors should have known their
assumptions meant it was misleading. While in our case, the misleading statement is to make
the contract more appealed to gain benefits for the company.
Moreover, the company also proved that the directors’ breach caused the company to suffer
loss or damage (Donohughe v Stevenson).
 Mark has breached section 180

Has the director breached section 181 and the general law?
Mack did not bring any detriment to the shareholders as the director of GP company. He did
most of the work to benefit to GP Pty Ltd while it can hurt the benefit of GA Pty Ltd. The
payments were only to be made by GP to GA and when GP had funds to make payment
GA will never demand payment from GP.
 In the perspective of the benefit of GP Ltd Pty, Mack did not breach section 181(1)
acting in good faith with a proper purpose for the company

Has the director breached section 182-misuse of position?

While the company is insolvent, Mack still caused the company to pay 8 employees, the
question is that did the payment included Mack and other people who have the good
relationship with him. If yes, he breached section 182 CA, due to increasing more debt to the
company.
As the company approaches liquidation, the assets of the are the creditors’ assets, and
company must prioritize the benefit of the creditor before shareholders and anyone else
(Kinsela v Russell Kinsela Pty Ltd). Also in the s563A CA, shareholders are generally the last
ranking in insolvency and will receive no return from the company if the creditors are not
paid in full.

Has the director breached section 191-material personal and did he disclose it?
The arrangement between GA and GP is never formally documented and no lease for a fixed
term was in place. It can be assumed that did Mack have any material personal interest by
hiding this information. It is understandable that not including the rent expense may help the
financial prospect of the company looks more healthy. To probe more, Mack can use the rent
expenditure which is not officially stated for his purpose.

According to Daniels v Anderson AWA case, all directors have an continuing obligation to
keep informed and all the information must be approved by the board and must be disclosed.
 He has breached section 191

Has the director breached section 588G?

Under s9 CA, Mack is the director of the company and he is liable for the insolvent trading of
the company

Defences

Defence 1: Business Judgement Rule

He acted in good faith and for the proper purpose for the GP Pty Ltd

He is suspected of gaining personal interest by did not disclose the rent expenditure

Applying the objective test under s180(1), the reasonable director would do the things benefit
to its company but not in the way as Mark did

 Mark failed to satisfy all 4 elements of Business Judgement Rule. He cannot rely on
this

Defence 2: Reliance on others under section 189

Mark can rely on Bob because he has the background as the director. However, in this
situation, Bob is not a reliable person to rely on due to these facts:

 Enter the agreement with his own company

 Having a private discussion in Gold Coast
 Mack failed to use this defence
Defence 3: Delegation of duty under section 190

Mack can delegate his work for Shi, but he still has to ensure Shi is trustworthy, competent,
and reliable. He also considers the there is the difference between delegating and abdicating
in the role of director.

In this case, the staff of GP is not included Shi, who is the general manager of GA.
Consequently, Mack also cannot rely on this defence

As the breach of section 588G, the director can also avoid personal liability by proving these
defences:

Under section 588H (3), there is reasonable reliance on a competent and reliable person who
fulfills their duty. Relying on other directors in the company is not reasonable, while Bob is
not only the director of GP, but he also has the background of the lawyer. The problem is that
Bob is not officially appointed as the lawyer of the company. Moreover, he is not a reliable
person. Mack cannot rely on this defence.

Safe Harbour Protection

Under section 588GA, the direct can rely on the safe harbour as the suspect the company may
be insolvent and take action to help the company overcome this situation. There is an
insufficient about this factor, it can be assumed that Mack did not do anything to protect the
company from insolvency, and if yes, he failed to rely on s588GA.

Judicial relief can be considered in this case, as Mack has to prove that he acted honestly and
did not benefit himself or other persons. As the mentioned assumptions, he is potentially
suspected for the personal material benefit so that section 1317s cannot be approved.

The relevant case is the Mclellan, in the matter of The Stake Man Pty Ltd v Carroll, the
director can excuse from the liability for insolvent trading because director did not profit
personally, nor disregard from his advisor. These indicators differ from our situation.
Subsequently, judicial relief is not available for Mack.

Consequences

ASIC Statutory Remedies

Under this remedy, all director will have the same penalty, there is no CEO gets higher
penalties than non-executive director.

ASIC applies for the Declaration of Contravention under section1317E as the first step. The
potential remedies for the breach of Mack can be as follow:

 Mack will be banned from management with disqualification order under s206c
 Criminal penalties under section 184 because he acted dishonestly as mentioned
above

Director 2: Bob

Has the director breached section 180?

Bob acted recklessly by not including any internal costs incurred by BP. The relevant case is
ASIC v Healey, all directors are expected to have the basic skill regarding the financial
statement. By not including the internal cost which leads to the misstatement in the annual
report. However, it could be in the intention of Bob. In this circumstance, under section 180,
he breached the duty of care, skill and diligent

Has the director breached section 181 and the general law?
The director enters the contract with his own company, but the contract is benefit to the
company. There is no information that his action is not taken into considered that the good
faith of company was a whole for the proper purpose.
 Bob has not breached this section
Has the director breached section 182 and section 183?
Bob obviously abused his position by taking advantage to his own company. It is clear that he
can gain this advantage by being the directors of the company and having confidential
information.
The advantage that he gained is the internal cost excluding in the report. By not including this
cost, his company can get rid of the large amount of money which is detrimental for GP
shareholders. He has the motivating factors to implement this action.
Bob also has a private discussion in Gold Coast with MG. The purpose of this discussion is
unclear due to the lack of information. Other directors may have the question of whether Bob
received any secret profit or commission with MG or not. There will be a conflict of interest
in this circumstance. The breach of fiduciary duty by putting his personal interest in making
secret profit (Furs Ltd v Tomkies). The conflict of interests has to be disclosed in any
circumstances to prove that directors are not breached section 182-183.

Did the director make a secret profit under general law to compete with the company?
As mentioned above, Bob is suspected of making a secret profit with MG but there is no
information indicating that he tried to compete to the company. His action is the conflicts of
interest, he only used his potion and the information that he got from that position to benefit
himself, not for the purpose of competing the company.
The case can be mentioned is the Green v Bestobell Ltd, in this case, the directors used the
confidential information to benefit himself and compete against the company. The similarity
between Bob and the director in the mentioned case is that they both use the information to
gain advantages for themselves. However, Bob does not use it as a tool to compete with the
GP.

Defences
Business Judgment Rule=> Bob does not satisfy all 4 elements required in this defence
He can minimise the liability for insolvent trading by applying section 588H(4), he does not
actively manage the company while having the discussion in Gold Coast because he has to
attend into the contract with can bring the benefit to the company
He still failed to rely on Safe Harbour Protection and Judicial Relief

Remedies
Any breach of section 182-183 has both criminal and civil penalties. In this situation, Bob
will receive these penalties:
 He is banned from the management under section 206c which is the same as Mack
 He had the secret profit which benefits himself, the compensation order is applied to
him under section 1317H. Bob needs to pay it back to the company
 Bob will receive the pecuniary penalties under section 1317G
 Criminal penalties under s814 due to his dishonesty
General law remedies
Under general law, directors a owe duty to all members of the company. There are some
exceptions, but Bob failed to satisfy these. Bob profits from a breach of duty, he should pay
back the secret profit. All the money goes into his company’s account at this time could not
be touched which refers to the constructive trust.

Director 3: Cass
The difference between Cass to other directors is that she has a lawyer background. The
situation is not mentioned whether she is appointed as a lawyer of the company, so she only
acted as a director of GP
Cass entered into the arrangement with BP which Bob is a director. It can be assumed that
she might not know about the fact. The section that Cass has breached is section 180, she
owes the company for the duty of care and diligence about the financial performance of the
company. She has the responsibility to track the agreement with BP, she also has to raise
awareness about the significant problems related to the company. Consequently, she breached
section 180. However, there is no indicators prove that she has any material personal benefits
or misuse her position. She is also liable for the insolvent trading under s558G.
Defence
She failed to rely on the Business Judgement Rule because she does not satisfy the section
element which is informed herself.
Cass was not aware of the financial difficulties of the business, and she did not raise
awareness about it. The relevant case is Morley v Statewide Tobacco Service Ltd which
relates to s588H (2). Directors who do not monitor financial performance of the company
will not be a valid defence against insolvent trading.
Cass can relief on judicial relief by not acting dishonestly.

Consequences
Cass is applied for statutory remedies which can be civil penalties and disqualification.

Shareholder’s remedies
Shareholders cannot make management of the company under section 198A; however, they
can make the statutory remedies to protect themselves from being exploited by majority
shareholders. In this circumstance, Mr. X can use the statutory remedies, especially the
oppression remedy.
Under section 232, whether Mr. X is available for this remedy. To succeed, Mr. X has to
prove the conduct of the company’s affair or its actions or resolution was either oppressive,
unfairly prejudicial, or unfairly discriminatory against him.
As mentioned above, Bob acted to benefit himself which is detrimental for the benefit of GP
and affects the dividends of Mr X. Applying the objective test was the decision made by Bob
that no board of directors acting reasonably would have made. Bob breached section 232, and
the relevant case is Wayde v NSW Rugby League. In this case, the director did not breach
s232 because there was no oppression by cutting down the team members, and the court
found that it was fair to the game. However, this is not the same in our circumstance. The
failure of directors to act in the interest of the company as a whole (Re Spargos Mining NL).
The remedies for the oppression under s233 can be as following:
 Removal of director from the management, board replacement
 Appoint receiver and wind up the company

External Administration
The company can appoint the voluntary administration to give GP a chance at survival under
s437A. The deed of company arrangement (DOCA) sets out how the company deals its debt
while the company still trades. By doing so, the administrator must be independent of the
company, and directors of the company must step back to let the administrator inspect the
book. GP can fix all the detective products and keep progressing its contract with BP and
Berriton Pty Ltd.