Company Law Essay Example

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Company Law 3

Company Law

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Step one: Legal Issue

This step involves identifying the legal issues on a particular scenario that could raise legal questions both in company law and case law. The legal issue in this scenario is whether the directors had any obligations in insuring the shipment of the cocoa.

Step 2: rule of law relevant to the identified principle

According to Corporations Act 2001 (Cth) the directors should act in the best interest of the company. This means that the directors should not make decision that will result to the company losing its valuation or part of its assets (Adamson, 2010). The company have a duty of care that will ensure that they take the best decisions that are to give the best result to the company. This is one of the duties of the board of directors and, therefore, the directors should take a decision that will protect the interest of the company by ensuring it will not lose as a result of the taken decision (Emerson, 2009).

In this scenario the directors could have looked at the consequences that the company will have by the decision of not insuring the shipment. They should analyse if the decision will be beneficial to the company or lead to loses to the company (Gibson and Fraser, 2013). The reason behind this is that according to the Corporation act, the company directors have the right and power to discharge their duties with a lot of care and diligence. This duty of the company directors is to ensure that the directors take business judgement so as to make sure that the directors have good faith in the decision take and with the proper intent. This duty also ensures that the directors do not have any personal interest by passing any judgement. This is to ensure that the company is run in the fairest way (Adamson, 2010). The duty also works to ensure that the directors have reasonably debated on the decision so as to settle on it as the most beneficial to the company. This will help the directors reach the decision as one that has the best interest of the company (Emerson, 2009).

This act ensures that the directors do not bring the personal matters and interest into the company. This protects the company from selfish interest of the directors which will ensure that the company does not engage into business that will result to losses (Emerson, 2009). This is to ensure that the company directors’ decision does not lead the company into breaching company its obligations. The reason behind this is that the company will be mistaken as a failing company to the other companies and will not receive any business dealings from the other companies in the same line of business (Clarke, 2006). The company may be forced to pay heavy penalties for the breach of contract and this can be extended to directors. The directors can have remedies for acting out of the allowed duties (Gibson and Fraser, 2013). The company can cancel the contract that they believe was not in the best interest of the company and not as per the company set objectives (Gillies, 2004). This protects the company from any breach of the contract because breaching come with a lot of remedies (Adamson, 2010). These remedies include the remedy of restitution that puts the non-breaching company in a position to enter into another contract with a different company or have new terms to the breached company. Breach of contract is a very serious scenario in business because the breaching company destroys its reputation in the market.

Step 3: Application of law

To identify if the legal issue in the scenario there is need to apply case law as it has been in other cases. This will enable in reaching into a conclusion if the directors failed in their performance of duty as obligated to them by corporation act of 2000 that states that the directors should have the duty of care to the company (Clarke, 2006). This duty of care would ensure the directors protect the company interests in every decision they take on behalf of the company. In applying the law it will help identify if the directors had any mistake on not insuring the cocoa shipment on the basis of reducing the expenses (Miller and Cross, 2004).

In a case Daniels (formerly practising as Delloitte Haskins & Sells) v Anderson; Hooke v Daniels; Daniels v AWA Ltd (1995) 13 ACLC 614; 16 ACRS 607, AWA ltd suffered $49 million loss because one of its employees engaged the company in an unauthorized exchange rates (Emerson, 2009). The reason behind this loss is that the company auditors Delloitte Haskins & Sells failed to notice the foreign exchange dealings therefore, not reporting it to the board of directors (Gibson and Fraser, 2013). The auditing company also did not point out that the internal system of the company was weak in controlling and recording the foreign exchange dealings. In court the directors of the company and the auditor were held responsible for the company losses and company weaknesses (Adamson, 2010). The directors appealed the case stating that they do not owe any care of duty to the company and, therefore, they could not be held responsible (Miller and Cross, 2004).

Issue before the court was what duty of care the directors owed the company. The issue is also to identify if the common law imposes any duty of care to the directors of the company.

The court held that there is a lot of care of duties imposed on directors of a company by legislation. There are also other that have been imposed on directors by the common law. The company directors should have duty of care to the company and should take reasonable decisions while performing their duties as directors. The failure of directors to follow the imposements leads to breach by the directors.

The reason behind the judgement is that the company owed duty of care to the company and, therefore, acted in negligence.

Step 4: conclusion

The directors acted in negligence by failing to insure the shipment and they were aware that this was a great risk for the company. This means that they were liable for the losses.

Part 2: company insolvency

Insolvency in a company occurs when a business has assets which are not sufficient to cover and pay their debts, or when a business is not in a position of paying its debts when it is required to (Gillies, 2004). High profile company insolvency occurs when this high profile company has debts and is not in a position to pay up the debts, since the assets of the company cannot meet all the debts the company owes. In case of insolvency, the administration of a company stops any legal process or even action from going on, unless a court or an administrator gives the go ahead (Miller and Cross, 2004). This in turn hinders the creditors of the company from undertaking any legal actions against the company in an effort of obtaining the outstanding debts. This action is taken by the company’s administrator in the interest of the creditors of the company as a whole. The administration reviews the company’s position as well as collecting the company’s information, and then takes over the daily control, management and running of the company (Gillies, 2004). The creditors receive a written appointment from the company and a report is sent to them 8 weeks after the appointment. All the creditors receive a written report about the administration every 6 months. What the company owes is frozen on the day of administration and the creditors are paid after the company’s assets are realised, and after the costs of administration. The creditors are paid depending on their types; secured creditors, preferential creditors, unsecured creditors or even share- holders or even members (Abbott, Pendlebury and Wardman, 2007). Secured creditors are paid from the realisation of the specific assets after the costs of realisations are deducted, so are the other creditors depending on what the company owes them. In an occurrence of a high profile company insolvency, the creditors are eventually paid but, with time after the realisation of assets from the company, and when the company can be able to pay them (Miller and Cross, 2004).

In this scenario the company has failed in meeting its expenses and it does not settle its obligations. This means that the company cannot pays its creditors and this is the same reason the company avoided insuring the shipment because it could not afford (Clarke, 2006). The company also did not pay fully for the shipment because they only paid 25% of the total cost. The company could not be even pay its taxes to the tax authority and this lend to a direct penalty to the company. The direct penalty could not be paid to the Australian Tax Office (ATU). This means that the company directors will be liable to paying the taxes for the company they represent (Abbott, Pendlebury and Wardman, 2007). As explained earlier in the paper when a company fails to settle their obligation owed to its creditors and fails to continue with its operations means that the company is insolvent. The company have a lot debts incurred so as to keep the company into the operation. The company cannot pay its debts therefore, it is insolvent.

Part 3: Liability to the directors

According to the corporations Act the directors of companies have been imposed with a lot of liability so as to ensure that the directors do not allow the company to trade when it is insolvent (Goldman and Sigismod, 2010). The corporations Act imposes personal liability and civil penalties to directors who allow their companies to trade while insolvent or when the directors are aware that the company cannot settle it obligations (Lambris, 2012). This is to ensure that directors are very careful so as to incur any debt while the company is near or insolvent. The law works to ensure that the creditors of company do not suffer losses as a result of a company becoming insolvent (Clarke, 2006).

According to section 588 G of the Corporation Act the director should be held liable if at the time the company becomes insolvent he or she was still a director. This means that the directors should work to prevent any debt in there are signs that the company won’t be able to pay back the debt. The section also states that a director who allows a new debt to be incurred and he or she is aware that the company is insolvent should take responsibility or even face civil penalties because of leading to losses of the creditors’ money (Abbott, Pendlebury and Wardman, 2007). The act also states that no director should allow a company to incur a debt that they are ware or have reasons to believe that such a debt will lead the company to insolvency (Goldman and Sigismod, 2010). This means that the company directors should not engage into business if the company financial position is not strong enough to settle the existing debts and incur new ones. This means that anyone who contravenes this section commits an offence under the law and is liable to penalties. Therefore, according to the law the directors of Cocoa Ltd should be held responsible because they incurred debts and yet they had seen signs that the company financial position was not strong (Miller and Cross, 2004). This was evident because the company could afford to insure the shipment and could pay the whole cost of the cocoa from Costa Rica. After the shipment sunk the company incurred a lot of debts so as to sustain its operations because all its financial sources were limited as a result of the losses the company incurred. The company could also not pay its taxes to the tax authorities because it was not stable at that time. The directors should be honest during carrying out their duties and should act in way of dishonesty when they know their company is insolvent so as to incur a debt (Abbott, Pendlebury and Wardman, 2007).

The liabilities to the directors include;

Civil penalties

Contravention of insolvent trading law is an offence that attracts penalties from the directors which can include fines and other penalties (Goldman and Sigismod, 2010). This means that if the court finds the directors guilty of breach of this section of the act it will penalize them for allowing the company to trade when it was insolvent. This penalty can go up to $200,000 dollars depending on the weight of the matter before the court. This means that the directors are personally responsible for any decision they take on behalf of the company.

Compensation proceedings

The creditors of the company can take action to recover their losses from the directors of a company through a liquidator. This can be as a result of a compensation order issued against the directors of the company personally. There is no limit on the amount that the directors should pay and this is risk because the directors can be led to bankruptcy and this will lead to automatic disqualification as a director.

In a case Commonwealth Bank of Australia v Friedrich 9ACLC 946, Maxwell Eise who was a director in the company was held responsible for letting the company incur a new debt and yet he was aware that the company was not in a position to pay back the loan (Latimer, 2012). The company has incurred a debt of over $ 96 million. The court held that the director should be held liable for allowing the company incur debts instead of preventing the company. The court said the decision behind this decision was that the director had breached section 588G of the Corporations Act. This will be a good case in deciding the liability that the directors of Cocoa Ltd should have on the company’s debts (Clarke, 2006). Therefore, the directors should always be aware of the current financial company of the company so as to protect it from insolvency.

Criminal charges

The directors have also been charged in court if they are found to have acted in a dishonesty way so as to allow the company to incur a new debt (Miller and Cross, 2004). Directors who have been found guilty of misleading the company in incurring a new debt and yet they are aware that the company will not be able to settle all its obligations (Abbott, Pendlebury and Wardman, 2007). The directors who are found guilty of such issues attract a fine of up to $ 220, 000 or even an imprisonment of up to 5 years (Abbott, Pendlebury and Wardman, 2007). The directors should ensure that they perform their duties in the most honest way possible and to take action so as not to lead the company into insolvency. The directors of Cocoa Ltd are guilty of acting in dishonesty way because they knew the company could not pay off their debts and yet they incurred new debts.


Abbott, K, Pendlebury, N and Wardman, K. 2007. Business Law. Sydney: Cengage Learning.

Adamson, J.E. 2010. 21ST Century Business: Business Law. London: Cengage Learning.

Corporations Act 2001 (Cth).

Clarke, P. 2006. Company and Corporations Law . Sydney: Turnaround Publishers.

Emerson J.D. (2009). Business Law. London: Barron Publishers.

Gibson, A. and Fraser, D. (2013). Business Law. Sydney: Pearson.

Gillies, P. (2004). Business Law. Sydney: Federation Press.

Goldman, A.J. and Sigismod, W. (2010). Business Law: Principles and Practice. Sydney: Cengage.

Lambiris, M. (2012). First Principles of Business Law.Sydney CCH.

Latimer, P. (2012). Australian Business Law 31st edition. Sydney: CCH.

Miller, C. and Cross, J. (2004). Business Law: Text and Cases 11th edition. Sydney: Cengage.