Hampton Park Pity Ltd (HP) Synopsis. In the case study of Hampton Park Pity Ltd (HP) has four directors; William (Managing Director); Susan, Jack and Gail (Non-executive directors). As Haps financial position begins to deteriorate, George, the Chief Financial Officer of the company advises the accounts still show a profit and the company would have a solid base to pay out a dividend to its members. In July chips financial state worsens however George declares a technical profit and advises HP can still declare the dividend.
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June 2010 there was a change in the law for the declaration of dividends however George did tot find out about this until late September 2010, the same time the board signed off the financial reports and therefore George could not inform HP of the company’s financial difficulties. The board not knowing George’s advice was regarded as not true, seen it as favorable advice and decided to sign off the reports and declare the dividend to members. Susan was absent from this meeting from an unknown cause. Soon after her dividend was paid the company went into liquidation.
The issues relating to this case is whether there have been any breaches of the officers and erectors duty of care under the corporations act and what consequences will be made if such breaches occur. Another issue is whether there have been any breaches of directors duties in relation to insolvent trading and what defenses are available for directors who have breached their duties. And also what consequences are in order if such breaches occur. Issue 1: Breaches of a Director’s and Officer’s Duties under the Corporations Act. Director’s duties are supported by the Corporations Act (2001)1.
Under section 180, it requires directors to act with a degree of care and diligence. Section 1812 requires directors and other officers to act in good faith, in the best interests of the company and for a proper purpose. Section 1823 and 1834 requires directors to not improperly use their position and information to gain advantages or to cause detriment to an organization. The common law provides an objective and subjective standard toward the duty of care, skill and diligence. Section 181(1) of the Corporations act supports this. This standard requires what a common person with certain experiences that apply to the certain position would do when making important and proper decisions. Directors in HP hold different responsibilities and their duty and care are at different levels also which depends on their position. However, all directors of a board are equal. In the case, ASIA v Halley it was held that directors of the ASS listed entities in the Centre Properties Group and the Centre Retail Group breached section 181 (1) of the Corporations ACTA by approving the financial reports of the two groups.
Both as non-current liabilities. The court held that the directors also failed to take reasonable steps to comply with the financial reporting provisions of the Corporations act. 8 The directors argued that they didn’t have to take responsibility for the errors as the auditor should have detected them and advised the directors to alter the financial reports before they were signed and released. As I said above, all directors are equal in a company. Even though the auditor failed to classify the financial reports properly, the other directors should have detected this. All directors must have the ability to read and understand a company’s financial statements. “9 All directors hold the same mutual responsibility in a company, and should have the kills, knowledge and experience when it comes to making the right decisions. Therefore, relating these facts to Haps case, the directors breached their duty of care by failing to detect the errors of the financial reports. Referring back to Haps incident, Susan was missing from the board meeting in which deemed to be a very important one.
Susan being a very experienced businesswoman may have picked up on these errors before declaring the dividend if she was at her board meeting. In the case Variants v Australian Securities Commissioner it is stated that “a director is expected o attend all meetings unless exceptional circumstances such as illness or absence from the State prevent him or her doing so”. Following this precedent, Susan has breached her common law and statutory duties by failing to attend meetings especially before HP became insolvent.
Under section 19TH, it states that, “Unless the company’s constitution provides otherwise, directors may delegate any of their powers to a committee of directors, a single director, an employee of the company or any other person. 11 Under sass(1), it states that ” If the directors delegate a power ender sect 19TH, a director is responsible for the exercise of the power by the delegate as if the power had been exercised by the directors themselves. “12 Susan has delegated her power to run the company to William, and if William had any questions he would let her know.
There was still a business relationship between the two and therefore Susan will face the same charges as the other directors would. Now knowing the whole story, facts and law precedents, the remedies for breaching section 180-183 of the corporations act is a civil penalty provision: s 1317E13. Under ASIA, the penalty for breaching a director’s duty of care is a court order that the director be disqualified from managing corporations. 14 George and William have breached their duty of care and these penalties as I have explained above will apply to them in court.
Susan delegating her role to William has also breached her duty of care and will face the same consequences. Jack however, did not involve himself in the running of the company nor the financial position; he would be free of charge. Sail’s position on the company’s board we are not made aware of, therefore we Anton make a Judgment to what her duties were and whether she had breached them. Issue 2: Insolvent Trading. It is a director’s duty to prevent a company from becoming insolvent. “Insolvent trading occurs when a company incurs a debt when it is unable to pay its debts as when they fall due. 1 5 Directors in a company may become liable for the debts incurred by the company as they have breached their duties under sec 5886 of the Corporations Act. Preventing insolvent trading applies to the director of a company sass(4)(c)16 it states that “there are reasonable grounds to believe that the company ill be able to pay its debts as and when they become payable,” which is focused on the directors of the company as they are the overall control of the company. In the case ASIA v Playing 17 Playing became insolvent as they were unable to recover and pay off the debts after they had been due.
Section to prove that insolvency was present in a company at the time a debt was incurred or if the company became insolvent by incurring the debt. Referring back to the case ASIA v Playing, Manmade J of the Victorian Supreme Court indicated 14 common features to prove insolvency was present in a company. Two indicators that stand out in the problem case of HP are; 1: Continuing Losses and 2: Inability to produce timely and accurate financial information to display the company’s trading performance and financial position, and make reliable forecasts.
George (SCOFF of HP), knowing the company was becoming insolvent, has provided false or inaccurate financial information to the board. William, Jack and Gail should have known from their experience and expertise that the company is facing losses financially. This is tested by which what any ordinary person in this position would do. Also William putting his faith into George, and Susan putting her faith into William. Susan, William and George are all liable for the debts incurred through insolvent trading. One of the major difficulties with insolvency is actually proving the breaches of director’s duties in insolvent trading.
Under see(4)19 there is a likelihood a company will be insolvent where it is proved that a company has not kept satisfactory accounting financial records which detail its financial position in a certain period of time. In Haps case, it was discovered that George, (Haps Financial Officer) had devised the board to show a profit in July 2009, and HP would have a solid basis for declaring the dividend. He again, falsely advised the board that HP has made a technical profit and HP could declare a dividend. Section IEEE(4) supports the facts that George has failed to keep or retain adequate financial records.
However George could argue that there were not reasonable grounds for suspecting insolvency. In the case Williams v School 20 directors had also argued that they had not engaged in insolvent trading as there were no reasonable grounds to suspect it. Chesterton J, mound that there were reasonable grounds to suspect insolvency as the company was running a loss and trading had still occurred in this period. Applying this case to HP, HP was running a loss as the dividend was declared. Even before the debt was incurred, the company was running a loss proving that HP was insolvent.
Again, William, Jack and Gail all involved in creditable positions should have known of this even with the wrong advice from George. Due to the facts above and under saga of the Corporations Act I believe Susan, Jack, William, Gail and George have breached their duties in preventing the company from coming insolvent. Issue 3: Defenses and Penalties for a director’s breach of duties relating to insolvent trading. When a director of a company is being charged by breaching their duties under insolvent trading, there are a number of defenses that are available to the 4 defenses that are available to directors.
One defense that is available to Susan under s UH(4)22 is the defense of being absent from management. Susan was absent from the board meeting when the 2010 financial statements were signed off and where the (debt) dividend was declared to members. However, we do not know he reason why Susan was absent from participating in management of HP. In the case Deputy Commissioner of Taxation v Clark , a married woman who was a director of the company, failed to attend an important board meeting as she was divorced from her husband who was the other director of the company and had deferred from her husband.
The court held that, depending on saga of the Corporations Act that a person shouldn’t become a director unless they were prepared to undertake every responsibility of such a position. Therefore the woman could not rely on the absence from management defense. However we do not specifically know the reason of Suntan’s absence, so she may or may not be subject to this defense. One defense that is available to William, Jack and Gail is under s UH(3)23 which is the defense of relying on another person. The directors relied on George’s excellent financial skills to lend financial creditability to the company.
They must establish a number of matters before he can rely on this defense. “William, Jack and Gail must prove that at the time when the debt (dividend) was incurred, he had reasonable grounds to believe, and did believe, that a competent and reliable person Ewing George, was responsible for providing the board with adequate information about whether the company was solvent and that the other person was fulfilling that responsibility and expected on the basis of information provided by that person that the company was solvent at the time and would remain solvent even if the director incurred the relevant debt”: shish(3)24.
However this defense can be unreliable. In the case ASIA v Playing 25 Elliot the non-executive director, argued that he relied on financial information given to him by the managing director of the company. This is the same case with HP; the board of directors is relying on George to supply him with the financial state of the company. Referring back to ASIA v Playing, the court argued that a ‘reasonable person’ wouldn’t regard Playing and management were reliable directors in their field of expertise and would not believe they would provide adequate information about the company’s solvency.
An experienced businessman would not only receive advice about the company’s solvency and financial state but would also need to check up on the financial records himself before incurring a debt. Elliot did not do this and relating this to HP nor did he board of directors. Therefore this defense would be rejected. The penalties that are involved for insolvent trading come under two categories, either a civil penalty or a criminal penalty. In Haps case, a civil penalty is to be ordered to the directors in breach of their duties in conjunction with insolvent trading.