Question 1

Explain the purpose of the safe harbour against insolvent trading in s 588GA of the Corporations Act.

Accepted Answer

The safe harbour rule is intended to encourage directors to take steps to restructure a company rather than prematurely putting the company into voluntary administration. The safe harbour provides protection for personal liability for debts incurred directly in relation to a course of action that could be reasonably expected to improve outcomes of the company, provided various conditions are met.

Question 2

When is a company 'insolvent'?

Accepted Answer

Recall that the wording of s 588G requires a company to be insolvent when it incurs a debt or become insolvent by incurring debts, including the debt in question. Section 95A defines it as - a company is insolvent if it is unable to pay all its debts as and when they become due for payment. The cash flow test asks whether any cash is likely to flow to the company from:
•the sale of assets,
•obtaining a loan from a bank,
•the shareholders injecting more capital, or
•future sales of goods or services.
If no cash flow is expected, then the company is probably insolvent.

Question 3

List the directors' and officers' duties that apply under the Corporations Act.

Accepted Answer

The statutory duties imposed by the Corporations Act are:
• act with reasonable care and diligence - s 180
• for directors only - prevent insolvent trading - s 588G
• act in good faith in the best interests of the company and for a proper purpose - s 181
• not misuse position - s 182
• not misuse information - s 183
• disclose certain interests - s 191
• disclose to other officers and vote (proprietary companies) - s 194
• disclose and not able to vote (public companies) - s 195
• avoid related party transactions - Chapter 2E.

Question 4

Explain why a duty to prevent insolvent trading is imposed on directors by statute.

Accepted Answer

Remember that one of the key duties of c

Question 5

How does a court decide whether a director has breached their duty of care? What is the minimum standard that is applied?

Accepted Answer

The court examines the actual amount of

Question 6

In order to exercise the minimum standard of care, directors and officers must, among other things:

Accepted Answer

A)  Acquire a basic understanding of the business and be familiar with the fundamentals of the business. 
B)  Make sufficient enquires to inform business decisions. 
C)  Stay informed about the activities of the company. 
D)  Not ignore any misconduct of the company. 
E)  Be familiar with the financial status of the company by reviewing financial statements.
F) None of the above are correct.
G) All of the above is correct. 
A)  Acquire a basic understanding of the business and be familiar with the fundamentals of the business. 
B)  Make sufficient enquires to inform business decisions. 
C)  Stay informed about the activities of the company. 
D)  Not ignore any misconduct of the company. 
E)  Be familiar with the financial status of the company by reviewing financial statements.
F) None of the above are correct.
G) All of the above is correct.

Question 7

Under the common law, directors have a duty to avoid conflicts of interest, act in good faith and for a proper purpose and not to trade while insolvent.

Accepted Answer

A) True 
 B)False

Question 8

In order to ascertain whether a company is insolvent for the purposes of section 588G(1), the test is whether the company's liabilities exceed its assets.

Accepted Answer

A) True 
 B)False

Question 9

Does the standard of care differ depending on the type of director?

Accepted Answer

All directors and officers must have the

Question 10

What is the interaction between the general law and statutory duties?

Accepted Answer

There is significant overlap between the

Question 11

Ira is a director of a large company. The board can delegate some of its activities and roles to a third party who the board see fit to undertake those tasks.

Accepted Answer

A) True 
 B)False

Question 12

In order for there to be a breach of section 588G, which of the following elements must be established:

Accepted Answer

A)  The person must be a director of the company. 
B)  There must be an incurrence of a debt. 
C)  The company must be insolvent at the time the debt is incurred. 
D)  There needs to be reasonable grounds to suspect the company was insolvent. 
E)  The direct must be aware the company is insolvent.
F) All of the above need to be established.
G) Only (a), (b), (c) and (d) need to be established. 
A)  The person must be a director of the company. 
B)  There must be an incurrence of a debt. 
C)  The company must be insolvent at the time the debt is incurred. 
D)  There needs to be reasonable grounds to suspect the company was insolvent. 
E)  The direct must be aware the company is insolvent.
F) All of the above need to be established.
G) Only (a), (b), (c) and (d) need to be established.

Question 13

Why does the law impose duties upon company directors and officers?

Accepted Answer

Managers are obliged to manage the compa

Question 14

If a director breaches his/her duty of care, skill and diligence, what are the potential consequences for the director?

Accepted Answer

A director in breach of his or

Question 15

List the sources of the directors' and officers' duty of care.

Accepted Answer

The duty of care and diligence

Question 16

Jamie and Larry are the only directors of Titanic Pty Ltd. Mary is the Chief Financial Officer of Titanic Pty Ltd. It has been determined that Titanic Pty Ltd was insolvent and during the time it was insolvent it traded thereby incurring debts. Which of the following is incorrect:?

Accepted Answer

A)  Jamie, Larry and Mary may face liability under section 588G for insolvent trading. 
B)  Jamie and Larry could possibly be found to have committed a criminal offence. 
C)  Even if they have breached 588G, the directors of Titanic Pty Ltd may avoid liability if they can establish a defence under section 588H. 
D)  There would only be a breach of section 588G if at the time of incurring the debts, Titanic Pty Ltd's liabilities exceeded its assets. 
E)  If Titanic Pty Ltd paid a dividend while it was insolvent, this would be automatically deemed to be an incurrence of a debt for the purposes of section 588G. 
A)  Jamie, Larry and Mary may face liability under section 588G for insolvent trading. 
B)  Jamie and Larry could possibly be found to have committed a criminal offence. 
C)  Even if they have breached 588G, the directors of Titanic Pty Ltd may avoid liability if they can establish a defence under section 588H. 
D)  There would only be a breach of section 588G if at the time of incurring the debts, Titanic Pty Ltd's liabilities exceeded its assets. 
E)  If Titanic Pty Ltd paid a dividend while it was insolvent, this would be automatically deemed to be an incurrence of a debt for the purposes of section 588G.

Question 17

Define "diligence" as used in s 180 of the Corporations Act

Accepted Answer

Diligence is about understanding the aff

Question 18

If a director breaches his/her duty of care, skill and diligence, what are the potential ramifications for the director?

Accepted Answer

A director in breach of his or

Question 19

Lucy is a directory of Big Wheel Ltd ("Big Wheel"). Big Wheel operates a large bicycle retailing business. Lucy was a world class cyclist and is the "face" of Big Wheel. She has no business experience. Lucy has no duty to understand the financial aspects of Big Wheel's business as she wouldn't understand it anyway.

Accepted Answer

A) True 
 B)False

Question 20

Explain the defences to liability for insolvent trading.

Accepted Answer

Four defences operate in favour of direc

Explain the purpose of the safe harbour against insolvent trading in s 588GA of the Corporations Act.

When is a company 'insolvent'?

List the directors' and officers' duties that apply under the Corporations Act.

Explain why a duty to prevent insolvent trading is imposed on directors by statute.

How does a court decide whether a director has breached their duty of care? What is the minimum standard that is applied?

In order to exercise the minimum standard of care, directors and officers must, among other things:

Under the common law, directors have a duty to avoid conflicts of interest, act in good faith and for a proper purpose and not to trade while insolvent.

In order to ascertain whether a company is insolvent for the purposes of section 588G(1), the test is whether the company's liabilities exceed its assets.

Does the standard of care differ depending on the type of director?

What is the interaction between the general law and statutory duties?

Ira is a director of a large company. The board can delegate some of its activities and roles to a third party who the board see fit to undertake those tasks.

In order for there to be a breach of section 588G, which of the following elements must be established:

Why does the law impose duties upon company directors and officers?

If a director breaches his/her duty of care, skill and diligence, what are the potential consequences for the director?

List the sources of the directors' and officers' duty of care.

Jamie and Larry are the only directors of Titanic Pty Ltd. Mary is the Chief Financial Officer of Titanic Pty Ltd. It has been determined that Titanic Pty Ltd was insolvent and during the time it was insolvent it traded thereby incurring debts. Which of the following is incorrect:?

Define "diligence" as used in s 180 of the Corporations Act

If a director breaches his/her duty of care, skill and diligence, what are the potential ramifications for the director?

Explain the defences to liability for insolvent trading.

Legal Issues in Events Promotion and Company Winding up

Business Organisations

Companies and Incorporation

Company Constitution

Membership, Members Power and Dividends

Members Remedies

Corporate Governance and Company Management

PART B: Directors and Officers Duties

Financing a Company Via Equity or Debt

Receivership and Administration

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Exam 8: PART A: Directors and Officers Duties

Explain the purpose of the safe harbour against insolvent trading in s 588GA of the Corporations Act.

When is a company 'insolvent'?

List the directors' and officers' duties that apply under the Corporations Act.

Explain why a duty to prevent insolvent trading is imposed on directors by statute.

How does a court decide whether a director has breached their duty of care? What is the minimum standard that is applied?

In order to exercise the minimum standard of care, directors and officers must, among other things:

Under the common law, directors have a duty to avoid conflicts of interest, act in good faith and for a proper purpose and not to trade while insolvent.

In order to ascertain whether a company is insolvent for the purposes of section 588G(1), the test is whether the company's liabilities exceed its assets.

Does the standard of care differ depending on the type of director?

What is the interaction between the general law and statutory duties?

Ira is a director of a large company. The board can delegate some of its activities and roles to a third party who the board see fit to undertake those tasks.

In order for there to be a breach of section 588G, which of the following elements must be established:

Why does the law impose duties upon company directors and officers?

If a director breaches his/her duty of care, skill and diligence, what are the potential consequences for the director?

List the sources of the directors' and officers' duty of care.

Jamie and Larry are the only directors of Titanic Pty Ltd. Mary is the Chief Financial Officer of Titanic Pty Ltd. It has been determined that Titanic Pty Ltd was insolvent and during the time it was insolvent it traded thereby incurring debts. Which of the following is incorrect:?

Define "diligence" as used in s 180 of the Corporations Act

If a director breaches his/her duty of care, skill and diligence, what are the potential ramifications for the director?

Explain the defences to liability for insolvent trading.

Legal Issues in Events Promotion and Company Winding up

Business Organisations

Companies and Incorporation

Company Constitution

Membership, Members Power and Dividends

Members Remedies

Corporate Governance and Company Management

PART B: Directors and Officers Duties

Financing a Company Via Equity or Debt

Receivership and Administration

Filters