AUSTRALIAN COMPANY LAW Essay Example

Australian Company Law

Legal Issues and Directors’ Duties

The first legal issue in the possible action to be brought against the directors of Poseidon’s Prize Seafood Restaurant Pty Ltd is the responsibility of Gracie as a director of the company. Gracie was away during the operation of the previous restaurant, Neptune’s Prize Seafood Restaurant Pty Ltd. Being a director, Gracie was required to be present to make decisions on the company’s business especially when the business got into debt. Section 588G (3) of the Corporations Act 2001 states that an individual makes an offence if the person was a director during the incurrence of the debt. Grace can however defend herself on the basis that she was sick during the period that the company began incurring debt. Furthermore, while away, Grace took measures to seek inspiration from seafood restaurants in Greece that would help revitalize their restaurant. Furthermore, she did not partake in any decisions that led to financial difficulties during the six month period and is thus exempt from penalty on this regard. Grace had a legitimate excuse to be away from business as she was sick and such did not contravene her duties as a director recklessly. Corporations Act 2001 (Cth) s588H (4) allows for the director not to be involved in the management activities of the firm due to an illnesses or any other substantial basis.

The second legal issue is the continued trading by Neptune’s Prize Seafood Restaurant Pty Ltd despite knowledge that the company was facing financial difficulties. Tasia as a director had a responsibility of care and diligence to the parties being affected by the trading of the company. The Australian Corporation Act section 180 (1) requires that the director exercises duties over the company that a reasonable individual would equally do if they were in the same position. Based on the fact Tasia knew that the company was facing financial difficulties it is justifiable to hold her liable for failure to prevent the debts that were incurred as there was increased disinterest in the company after the My Kitchen Rules program publicity went down. Gracie might also be held responsible for failure to prevent the debts as the company had begun facing financial difficulties before she took ill. Both Gracie and Tasia as directors should have known the contents on the financial reports of the companies which would have shown them the financial position of the company. Tasia is however more liable for the consequences of the company based on her decisions to continue trading while they had large tax liability that was unpaid and owed the creditors. The directors are thus liable to action brought against them by the liquidator for breach of director’s duty towards the company Neptune’s Prize Seafood Restaurant Pty Ltd.

The third legal issue is the purchase of the new refrigeration system and a state of the art Tandoori stove which Tasia believed would enhance the business of the restaurant. The new refrigeration system and the stove cost Neptune’s Prize Seafood Restaurant Pty Ltd $ 100,000. To ascertain the obligatory prospect of solvency, the director needs to ascertain more than a small hope of possible solvency (Keay, 2005). The new refrigeration system was meant to preserve the fish for longer periods of time. Despite this measure taken to avoid further debt, there were no other reasonable measures that Tasia took to avoid the company from incurring further debt. The cost of the new systems was additionally high, an amount that could have been used to pay some of the creditors and get more supplies to continue with operations in the restaurant. Tasia therefore failed to exercise her duties over the creditors and act in the best interest of the firm which would be to maintain a better relationship with the creditors. The fact that the bank no longer extended credit to the company means that the purchase of the new systems should have held less priority. Action should thus be brought against Tasia as the director who was in charge of making these decisions.

The fourth legal issue is the formation of a new company namely Poseidon’s Prize Seafood Restaurant Pty Ltd which was to take over the business formerly managed by Neptune’s Prize Seafood Restaurant Pty Ltd. Neptune’s Prize Seafood Restaurant Pty Ltd would thus cease to trade. The new company furthermore failed to pay for goodwill, plant and the equipment used by the company. The establishment of the new company while the previous company was in debt was a breach of duty to the company. Based on the general law that are requires duty of care to the company, skill and diligence, the directors were negligent in taking care of the company’s interest (Tomasic, 2001). The Corporations Act section182 (1) states that the director should not use their position in a manner that is used to gain advantage for themselves or for someone else. Engagement in conduct that is detrimental to the company means that the directors have misused their position. The two directors, Tasia and Grace were in breach of duty as they started a phoenix company and thus had dishonest intention of benefiting from the phoenix company.

Conclusion

In conclusion therefore, the four legal issues identified from the case of the liquidation of Poseidon’s Prize Seafood Restaurant Pty Ltd include absence from management of the company, continued trading while the company was in debt, failure to notify creditors of insolvency and general breach of duty by creating a phoenix company. The two directors were thus liable for action to be brought against them for contravening the aforementioned laws as required by the Corporation Act.

References

ASIC Regulatory Guide 217 – Duty to Prevent Insolvent Trading – A guide for Directors.

Corporations Act 2001 (Cth) s588H(3)

Corporations Act 2001 (Cth) s588H(4)

Keay, A. (2005). Wrongful trading and the liability of company directors: a theoretical

perspective. Legal Studies, 25(3), 431-461.

Tomasic, R. (2001). Governance and the evaluation of corporate law and regulation in australia.

, 1(3), pp.24-32.Corporate Governance: The international journal of business in society