Insolvent Trading Provisions

The corporate world has developed in a consistent way and as a result, it has been able to enhance its activities in the market. Following these developments, the need for systematic laws and regulations that are meant to provide guidance in the running of business activities and in dealing with critical issues that may arise. This is due to the fact that unjustifiable business behavior has increased. Therefore, in order to protect shareholders in businesses and consumers at large, different governments have developed rules and regulations within their area of jurisdiction to define the required corporate behavior. Among these governments is the Australian government that developed the Corporations Act 2001. Similarly, this government has also created bodies that are mandated with the task of overseeing and ensuring that these laws and regulations are adhered to. Among these bodies is Australian Securities & Investments Commission, ASIC.

Despite the fact that the government has worked hard to provide such guidance to the business community, there are still cases of business malpractices that have been detected in within the corporate society. Among the common malpractices is the failure by either the whole board of directors or individual entities within this board in playing their roles or rather fulfilling their duties as directors to the businesses or organizations in which they have been appointed to serve. For instance, the case of Melbourne Pty Ltd and its insolvent trading clearly revealed breaches to directors’ duties to this company.

According to Tomasic, Bottomley & McQueen (2002, p.318), no single entity or rather individual is permitted to neglect his or her duties to work on personal issues while putting the company activities at stake. With this in mind, it is important to note that the directors of Melbourne Pty Ltd failed to deliver their duties as directors to this company. First, personal interests were put above the interests of the company thus compromising with the standards of its activities. For instance, it was evident to all directors of this company that Susan had other business interests apart from that of the company and as a result relinquished her authority as a director to William and trusted him on every word he spoke concerning the company. This is similar to Sarah, William’s wife who failed to attend board meeting since her husband was a member of this board. In her mind, she believed that her husband was in a position of correctly reporting to her every issue that had been discussed at the board meeting.

Similarly, Jack, as a financial director also failed in his duties to Melbourne Pty Ltd. To begin with, Jack’s meeting attendance deteriorated after he was diagnosed with a heart condition that compromised with his ability to serve as a director. In the same line of thought, it must be understood that Jack failed to submit his resignation both to the company and to ASIC as required by law until he was sick to the point of being unable to do so (Tomasic, Bottomley & McQueen 2002; p.151). With this in mind, he failed the company in his duties since his absence meant that the company activities would be compromised. On the other hand, William is not an exception. As an executive director, he had a mandate of making certain that board meeting were attended by the members irrespective of their position or relation to him. He also failed by providing wrong reports concerning the company’s financial status, an issue that raises concerns in regard to his role in the financial failure of this company.

In reference to the Corporations Act 2001, Division 3, 854A, subsection 4(b), a person violates the ‘keeping relevant record clause’ when he or she provides misleading records or omits sections from these records thus providing information that is misleading to both the ASIC and the rest of the board members (Commonwealth Law 2010). The executive director of Melbourne Pty Ltd violated this section of the Corporations Act 2001 by providing financial information in regard to Melbourne Pty Ltd to the rest of the board members when he clearly understood that the company’s financial position was not stable. In addition, there is a serious breach of the directors’ duties in the sense that major decisions in this company were made either by the executive director alone or together with his wife Sarah. In this respect, it was difficult to ascertain whether the decisions that had been made lacked vested interest or whether they had been made in good faith (Vermeesch & Lindgren 1990, p.581).

There are defenses that are available that can be explored by these directors in relation to their actions. However, Sarah and Susan have no defense whatsoever in relation to their attendance of board meetings. William on the other hand has a defense that he could apply to defend himself from his actions. According to subsection 854A (3), ‘an individual is not required to give information in accordance with a requirement covered by paragraph (1)(c) or (d) if the information might tend to incriminate the individual or expose the individual to a penalty’ (Commonwealth Law 2010). Therefore, William was not liable to report on the situation of the company taking into account the fact that he was the only director who was running this company. Despite the existence of clauses in the Corporations Act 2001 that can be used to exempt one from certain actions, the directors of Melbourne Pty Ltd were liable to prosecution as they had compromised with the working standards that have been stipulated in the laws and regulations that have been set by the Australian government in regard to the conduct of company directors.

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