Insolvency and misuse of power

Insolvency and misuse of power

Introduction

Each and every company is regarded as an independent entity that has a group of directors who are delegated to carry out their duties and responsibilities by the shareholders. These directors are responsible for carrying out the governance of the company. Their task is to adopt business decisions that would ensure the smooth functioning of the company. The entire regulation and the governance of the companies are in the hand of these directions. The functioning and the operations of the company are affected by the decisions they take. Their authority stems from the powers that have been delegated to them and it allows them an authority over the management affairs of the company. Having exclusive control over the management, it seems a possibility that they could misuse their powers to gain personal gains which could endanger or threaten the interests of the company as well at its stakeholders. It is on account of these existing threats that law imposes some stringent measures that would enforce on the directors the responsibility of minimizing any abuse of power as well as avoiding trading when the company is insolvent. This essay will elaborate on the duties of the director according to the laws of Australia, along with examining the “duty of good faith” and the duty of care as required under the Australian Corporations Act.

This paper will also focus on the responsibility of avoiding trading when the company is insolvent. This paper will also reflect on these responsibilities and provide an account of the various penalties imposed for violation of these responsibilities. Different cases and texts will also be referred to in order to reach an understanding on the duties of director and the scope and limitations of their actions. In short, it will discuss, reflect and analyse the following statement:

“We learn that under the Corporations Act, directors owe a duty to prevent the insolvent trading of their companies. We learn further that they must also not misuse their position as director. Indeed, directors who fail to observe their duties and obligations without legal excuse will be exposed to significant liabilities and penalties.”

The Legal duties of the directors

A director has many duties of which the two most important ones are preventing the insolvent trading of their companies and not to miscue their position as director. Directors who fail to execute their duties without any legal issue are liable to face penalties.

Before reflecting on the responsibilities of the directors and other legal implications, it would be better to delve into the definition of insolvency. An insolvent company is that company which is not able to pay for its debts when they are due to be paid. Allowing a company to trade while it is insolvent carries severe penalties. Companies which are facing financial difficulties need to look for independent advice on its duties and the available options.

A director is not necessarily the person who is appointed to this ...