COMPANY LAW

Company Law

ii

Company Law3

Issue 13

Rule3

Solvency5

Application5

Defences Available to the directors5

Conclusion6

Issue 27

Rule7

Statutory duties7

Application8

Breach of duties8

Defences Available to the director9

Conclusion9

References11

Company Law

As described in the case, there are two issues here (when seen to be complying with common law and corporations' law) that must be dealt with: the payment of interest on the $4 million loan that was taken from Friendly Bank Limited and the breach of duty on part of Brian, which he was supposed to perform as a director of Gemstones Pty Ltd. Both the issues will be analyzed separately using the IRAC method of legal analysis.

Issue 1

The issue here is whether or not the insolvency of Traders Pty Ltd happened due to the inability of its directors to pay the interests that had come due, on time.

Rule

The issue raised here is supposed to be dealt in accordance with the Corporations Act 2001, which is responsible for supervising and regulating interstate and federal business laws in Australia. Matters such as the legal formation of companies, legal duties of its owner, legal requirements of raising funds, and acquisitions etc are regulated in accordance with this law, as it primarily targets companies (Tomasic et al., 2002).

Section 588 of this Act defines the duties of company directors that should be performed in case insolvency is likely to occur, and what they should do to prevent that company from becoming insolvent.

Part 1 of this section defines the four scenarios, in which the section is applicable: if the defendant was the director of the company which took the liability, or if the company had prior debts on its balance sheet and still takes this one and becomes insolvent, or if the previous debts of the company are existent but not yet established, or even if the insolvency has occurred after this act had been enforced. Part 1(A) further outlines the seven conditions in which a company becomes liable.

Part 2 of this section establishes that the director would be punishable under law if he or she fails to avoid the insolvency from occurring (as a result of the additional liability that has been taken), even if he was either unaware or suspecting this to happen.

Part 3 defines the conditions under which the directors would be accused of committing an offense. This would happen if a person is a director of a company that has become insolvent as a result of incurring a debt that he or she suspected would lead to insolvency, also if the company was insolvent prior to the occurrence of that specific liability, and/or if the director did not honestly intend to prevent such insolvency from happening. Part 3(A) states that absolute liability would be applied in a case when the company becomes liable, and part 3(B) states that if the person is director of the company at the time it becomes liable and/or if the company becomes insolvent due to the occurrence of that particular liability, or a series of liabilities (acknowledged or unacknowledged) prior to that liability have contributed to the insolvency, strict ...