LAW2485 GROUP ASSIGNMENT - SEMESTER 2 2017 GENERAL INSTRUCTIONS: 1. Due date is by 5pm of Saigon time on 18 August 2017. Please note that an assignment submitted later than the deadline will receive a penalty. The penalty for work submitted late shall be ten (10) percentage points for work submitted after the prescribed deadline but before 5pm on the next day, with a further 5% for each further day or part thereof late. After 5pm on the fifth day following the day of the deadline, a mark of zero (0) will be recorded. 2. On an assignment cover sheet you must identify your name(s), a student ID(s), a lecturer name(s) and the time of your tutorial (e.g., Tuesday 11.30 tutorial). 3. Electronically submit the assignment through Turnitin.com link under the \"Group Assignment Question\" folder on Blackboard. The folder is located in the Assignments and rubric section of Blackboard. 4. The assignment must also contain appropriate referencing in the form of footnotes and bibliography in conformity with normal scholarly standards. The bibliography must include all materials that you have cited. 5. The word limit is 2500. Do not exceed the word limit. The word limit should exclude footnotes and bibliography. 6. Do not cut and paste legal rule(s) from a pdf file into your word document this is not allowed! A failure to comply with this will result in a zero mark for the rule part. 7. The maximum number of students in each group is four. If you wish, it is also possible to work individually or work with a smaller number of students. However please note the marking criterion remains the same. Please note that if you ignore this rule, your group will be penalised with 10% reduction in your grade for this assignment. 8. Marking criteria. Your tutor will be looking for evidence that you have: a. Clearly identified legal issues relevant to the question; b. Fully discussed and explained legal problems by applying IRAC method of legal analysis; c. Stated your arguments clearly with supporting evidence and proper referencing your sources; d. Used English language with care and accuracy and your paper has a good logical structure. e. Described legal sources (legislation and/or case law). f. For more information, please refer to Assessment rubrics posted on Blackboard. QUESTION Intelligent Kiddos Ltd (\"IK\") is a company involved in the publication and sale of children's books. Its main office is located in Sydney. Samuel was a shareholder and an executive director of IK, and was responsible for the day-to-day management and control of the company's business. IK also has two long-term employees Nam and Tam who have been with the company for almost 10 years. They are not shareholders. The remaining directors and shareholders of IK were based in two different states of Australia. Samuel had a disagreement with the other directors Cory and Jacob and subsequently proposed that they buy out his shareholding or that he would buy them out of IK, which was refused by Cory and Jacob. A few weeks later Samuel approached his friend Costa with an idea to incorporate a new company - Books and Tots Ltd (\"BT\"). Samuel and Costa began to work for BT. Costa later transferred his entire shareholding in BT to Samuel for no consideration, and Samuel was also appointed a director. BT started being involved in the publication and sale of children's books and Samuel provided the company with the lists of all future and current projects of IK. Moreover, Samuel also downloaded and shared with BT IK's entire customer lists, customer database, customer account information, client lists, client data, intellectual property such as the business plan of IK and a few trade secrets. This was done with the direct assistance from Tam and Nam who were paid commissions by Samuel. A few weeks later Samuel resigned from his directorship of IK fearing legal liability. Cory and Jacob found out that BT is a new competitor of IK and Samuel provided the company with confidential business information of IK. They decided to take legal action against Samuel and other persons of interest. ASIC also received a report about breaches of director duties and decided to conduct an investigation. In response to the allegations of breach of directors duties Samuel argued that BT was established legitimately by Costa as a cross-marketing venture with foreign publishers. He also argued that due to the irretrievable (permanent, irrevocable) breakdown in relations with Cory and Jacob, he had been compelled to resign and had taken the opportunity to move to BT. Samuel also claimed that BT was started without any purpose of competing with IK and information about publishers, customers and future projects was publicly available. REQUIRED: Advise IK and ASIC if there are any legal actions against Samuel and other persons of interest. Apply relevant Australian case law and legislation. Focus on the legal concepts discussed in week four. (30 marks) Directors Duties Fiduciary relations Who is a fiduciary? A fiduciary is someone who has undertaken to act for or on behalf of another in a particular matter in circumstances which give rise to a relationship of trust and confidence. The distinguishing obligation of a fiduciary is the obligation of loyalty and faithfulness. 8/15/17 RMIT University Vietnam Slide 2 Fiduciary relations 2 What is meant by a director's fiduciary duty? A fiduciary duty of a director is a duty which is derived from the principle that a director must be loyal to his company. Fiduciary duties apply to directors not only as regards the decisions they take in the boardroom, but also whenever a director is acting as an officer of the company or in relation to the company's assets or affairs. Any breach of any fiduciary duty will attract an equitable remedy. Equitable remedies are primarily restitutionary or restorative rather than compensatory. 8/15/17 RMIT University Vietnam Slide 3 Directors Number of Directors o Proprietary co: Minimum1 director (s.201A(1), Saloman). o Public co: at least 3 directors. 8/15/17 RMIT University Vietnam Slide 4 Directors 2 Definition o S. 9 - definition of director: a person who is appointed to the position of a director regardless of name given to their position. RMIT University Vietnam Definition includes: o De facto directors o Top level management o How that person is perceived by outsiders o Shadow directors 8/15/17 5 Directors 2 Types of directors (who are formally appointed) o Managing director o Chair of directors o Executive director o Non-executive directors. o Alternate directors 8/15/17 RMIT University Vietnam Slide 6 Directors: Procedures Board Procedures o Board meetings - passing resolutions. o Procedures set out in RR or Constitution. o s.248G (RR) - resolution must be passed by a majority of the votes cast by directors entitled to vote o s.248C (RR) - reasonable notice given for directors' meetings. 8/15/17 RMIT University Vietnam Slide 7 Directors: Procedures 2 o S 248F (RR) - quorum is 2 directors. o S 195 - public co: director is prohibited from being present and voting at board meetings where a matter in which the director has a material interest is considered. o S 251A(1)(b) - proceedings and resolutions recorded in minute books. 8/15/17 RMIT University Vietnam Slide 8 Directors: Procedures 2 Committees of the Board o Delegated power from the board o Ensure important matters are given full attention, and Workload distributed , eg audit committee o Appointment of Directors o Persons under 18 can NOT be appointed. (s 201B(1)). 8/15/17 RMIT University Vietnam Slide 9 An Overview of Director's Duties 8/15/17 RMIT University Vietnam Slide 10 Duties of directors 2 Duties overlap because sometimes more than one duty is breach by the same act. 1. DUTY TO ACT IN GOOD FAITH IN THE INTERESTS OF THE CO - overlaps with s.182 (duty not to improperly use of position) . Directors have: Both fiduciary duty (case law) and statutory duty (s 181(1)(a)) to act in good faith in the best interest of the company. 8/15/17 RMIT University Vietnam Slide 11 Duties of directors 2 'Good Faith' \"Good faith \" : Directors genuinely believe that they are acting in the best interests of the company. Must be more than subjective standard. Court imposes an objective standard. does the director act in a way which a reasonable director considered to be in the best interests of the company ? (Parke v Daily News) Usually easy to satisfy, what is hard is 'For the benefit of the company'. 8/15/17 RMIT University Vietnam Slide 12 Duties of directors 'For the Benefit / In the Interest, of the Company' (If the co is solvent) Courts take view that the duty to act in good faith in the best interest of the co means directors must act in the best interests of shareholders as a collective group. 8/15/17 RMIT University Vietnam Slide 13 Duties of directors 2 (a) Members' Interests Generally, interests of the co. is same as collective (not individual) interests of the members/shareholders. (Park v Daily News 1962 Eng) Both present and future shareholders. (Darvall v North Sydney Brick & Tile Co Ltd 1988) 8/15/17 RMIT University Vietnam Slide 14 Duties of directors (b) Employees' Interests Directors should not consider the interests of employees at the expense of the interests of the company's shareholders. Park v Daily News 1962 English Case 8/15/17 RMIT University Vietnam Slide 15 Duties of directors Park v Daily News 1962 English Case Facts Co. is sold and Co. paid out compensation to laid off employees out of co assets. Shareholder challenged. 8/15/17 RMIT University Vietnam Slide 16 Duties of directors Court held The benefit of the co. means the benefit of the shareholders as a general body. Here employees are not legally entitled to the compensation, and paying them compensation is not in the interest of co. (e.g. not fostering better employer/ee relationship, because co. was not continuing its business in the future.) 8/15/17 RMIT University Vietnam Slide 17 Duties of directors Court held (continued...) Director's duty is to the co., ie shareholders, not employees. May take employees' interests into account but shareholders' interests are paramount. Majority of shareholders are not entitled to ratify the decision to pay compensation to employees. Injunction granted. 8/15/17 RMIT University Vietnam Slide 18 Duties of directors Comment Directors can balance interests of stakeholders. As long as directors do not disregard interest of shareholders entirely in order to confer a benefit to employees (as in Parke), they are allowed to consider other interests beyond those of shareholders: i.e employee's interests. They would not be in breach of their duty. 8/15/17 RMIT University Vietnam Slide 19 Duties of directors New developments since 2000 The employee entitlements provisions are in a new Pt 5.8A requires that directors to consider the interests of employees in certain situations. Introduced to protect employees by preventing directors of employer companies stripping the companies' assets and making the companies insolvent so to prevent employees enforcing their entitlements. 8/15/17 RMIT University Vietnam Slide 20 Duties of Directors 2 2. DUTY TO ACT (EXERCISE POWERS) FOR PROPER PURPOSES . (Similar to duty to act for the benefit of the co., except the cases breaching these duties usually acting in the interest of directors themselves, rather than employees, creditors, etc.) . Board given broad powers of management (usually) by the RR and Constitution. 8/15/17 RMIT University Vietnam Slide 21 Duties of Directors 2 In deciding if this duty is breach, the court asks two questions: 1. Objective purpose for which a power was granted; 2. Purpose actually motivated the exercise of power. 8/15/17 RMIT University Vietnam Slide 22 Duties of Directors 2 Common Situations for breach Directors breach their fiduciary and statutory duties to exercise their powers for a proper purpose if they issue shares to: a. Maintain control of the existing directors in power b. To defeat a takeover bid c. Create or destroy the voting power of majority shareholders 8/15/17 RMIT University Vietnam Slide 23 Duties of Directors 2 Example To defeat a takeover bid - (In many cases, the share issue is being made to ward off a hostile takeover. The stimulus for a takeover is generally that the offeror thinks they can manage the company's assets more profitably than the current managers. Accordingly, the directors of the target company (i.e. the company which is to be taken over) will be likely to lose their positions if the takeover is successful. 8/15/17 RMIT University Vietnam Slide 24 Duties of Directors 2 One potential strategy for defeating the takeover is for the company to issue shares to someone who is sympathetic to management (often called a "white knight"), thus making it more difficult for the offeror to obtain sufficient acceptances of their offer to gain control of the company. 8/15/17 RMIT University Vietnam Slide 25 Duties of Directors 2 To defeat a takeover bid (continued) Howard Smith Ltd v Ampol Petroleum Ltd [1974] Facts: Takeover battle over the control of R W Miller (Holding) Ltd; Ampol & Bulkships controlled 55% of issued capital A & B made a joint takeover bid for all other shares Howard Smith (HS), which was friendly to the board, also made a takeover bid offering a higher price 8/15/17 RMIT University Vietnam Slide 26 Duties of Directors 2 The board recommended the shareholders accept HS's offer. A&B announced they would not sell to HS. The Board decided to issue extra shares to Howard Smith, to reduce A& B's shareholding into a minority shareholding. A & B argued the decision to issue shares to HS was motivated by improper purpose. The Board argued the co was in urgent need of funds 8/15/17 RMIT University Vietnam Slide 27 Duties of Directors 2 Court Held: The primary purpose was to reduce A & B's shareholding so HS can succeed in the takeover bid. 8/15/17 RMIT University Vietnam Slide 28 Duties of Directors 2 Example - Creating or destroy a majority of voting powers Whitehouse v Carlton (1987) HC Aust Facts: Co. shareholders are family of husband , wife + children. Constitution gives husband position of governing director, vests all powers of board in him alone. Husband and wife separate. 8/15/17 RMIT University Vietnam Slide 29 Duties of Directors 2 Husband issued new shares to his sons to ensure wife does not have voting control. Husband has a fallout with sons, now wants to argue the issue was invalid because of improper purpose. Court held: The power exercised was issue of shares, limit of power: purpose of destroying or creating a majority of voting power is not a proper purpose. Court order: Issue invalid. Revoked. 8/15/17 RMIT University Vietnam Slide 30 Duties of Directors 2 Other powers The duty to exercise powers for proper purposes applies to all exercises of directors' duties, not just share issues (see e.g. Darvall North Sydney Brick and Tile Co Ltd). 8/15/17 RMIT University Vietnam Slide 31 Duties of Directors 2 Mixed Purposes Directors may be motivated by a number of purposes, some proper, some improper, to issue shares. 'But-for' test: (Darvall, Whitehouse) Determine \"But for the alleged improper purpose, would the directors have performed the act impugned?\" Similar to causation test of the tort of negligence. 8/15/17 RMIT University Vietnam Slide 32 Statutory duty to act in good faith and for a proper purpose: s181(1) Examples of the breach of s.181: ASIC v Adler & Ors [2002] NSWSC 171 (confirmed on appeal ASIC v Adler [2003] NSWCA 131) Facts: Rodney Adler was one of the directors of HIH. An HIH subsidiary paid $10 million to a company\" of which Rodney Adler was a sole director - \"Pacific Eagles Equities\" 8/15/17 RMIT University Vietnam Slide 33 Statutory duty to act in good faith and for a proper purpose: s181 By use of a trust mechanism, approximately $4 million was used to acquire HIH shares to prop up share prices, venture capital unlisted investments were purchased from another Adler company, and loans were made to entities which were associated with Adler. 8/15/17 RMIT University Vietnam Slide 34 Statutory duty to act in good faith and for a proper purpose: s181 These transactions occurred with no board or member approval and without disclosure - the loans were given without proper documentation or security being sought and the payment was made so that it would not come to the attention of other HIH directors. 8/15/17 RMIT University Vietnam Slide 35 Statutory duty to act in good faith and for a proper purpose: s181 Court held: Adler was found to have contravened In good faith and for a proper purpose (s 181), Duty not to improperly use position (s 182), Duty not to improperly use information (s 183), And the duty to act with due care and diligence(s 180). Adler banned for 20 years from acting as a director and fined $450,000 8/15/17 RMIT University Vietnam Slide 36 Duties of Directors 3 3. DUTY TO AVOID CONFLICT OF INTEREST AND DISCLOSURE - General law - Fiduciary duties . Directors have a fiduciary duty of loyalty. There are two limbs to this duty: . no conflict and . no profit: 8/15/17 RMIT University Vietnam Slide 37 Duties of Directors 3 \"No conflict\" - Directors must avoid putting themselves in situations where they will be tempted to prefer their own interests, or someone else's interests, over those of the company. A director can be in breach even if she or he acts honestly and does not stand to make a profit. 8/15/17 RMIT University Vietnam Slide 38 Duties of Directors 3 Test - whether there is a \"real sensible possibility of conflict\". Eg if director has only 2000 Telstra shares, co uses Telstra for telephone services, no conflict. \"No profit\" - If a director profits from using company information or his or her position, the director is accountable to the company for those profits. 8/15/17 RMIT University Vietnam Slide 39 Duties of Directors 3 Exception for Both Rules : where the company's fully informed consent has been obtained (Disclosure). Full disclosure to the general meeting, general meeting vote to ratify, OR Often the constitution allows the board of directors to approve at general meeting. 8/15/17 RMIT University Vietnam Slide 40 Duties of Directors 3 Examples of breach of Conflict rules Director selling property to co, get highest price possible or lowest price possible? Director of two competing cos. Accepting a bribe to take a particular course of action (Boston Deep sea fishing) Misuse of company funds (Paul A Davies Pty Ltd) Taking up a corporate opportunity (Mordecai v Mordecai) Misuse of confidential information (Thomas Marshall v Guinle - competed with the co, soliciting business from the co's customer) 8/15/17 RMIT University Vietnam Slide 41 Duties of Directors 3 Differences between general law and statute Statute overlaps with GL to a degree, but also provide additional rules such as Ch 2E financial benefits (i.e. a shareholders approval is needed before the public co gives financial benefits to its directors). The duty to avoid conflicts of interest is also governed by the Corp Act ss181-183. Statutory provisions dealing with improper use of position and info apply to directors, officer AND employees. 8/15/17 RMIT University Vietnam Slide 42 Duty of Directors-3. Statutory law - Corporations Act 2001 Disclosure: s 191 : directors of a co must disclose to other directors \"material personal interests\" in a matter that relates to the affairs of the co. 8/15/17 RMIT University Vietnam Slide 43 Duty of Directors-3. Entitlement of interested director to vote S. 195 (1) for Public co -A director who has a 'material personal interest' in a matter being considered at a meeting of directors must not vote on that matter or be present at the meeting while it is being considered. Unless other directors allow it or ASIC makes an order allowing it S. 194 for Private co -no prohibition; depends on constitution. 8/15/17 RMIT University Vietnam Slide 44 Duty of Directors-3. Duty not to misuse position or information S 182(1) -- a director, secretary, other officer or employee of a corporation must not improperly use their position to: a. gain an advantage for themselves or someone else; or b. cause detriment to the corporation. . Example: a director take assets from co; signing documents on behalf of co without authority; etc 8/15/17 RMIT University Vietnam Slide 45 Duty of Directors-3. S 183 (1) - a person who obtains information because they are, or have been, a director or other officer or employee of a corporation must not improperly use the information to a. gain an advantage for themselves or someone else; or b. cause detriment to the corporation. 8/15/17 RMIT University Vietnam Slide 46 Duties of Directors 3 Related party transactions ---Public companies - Ch 2E Ch 2E regulates 'financial benefits to related parties' require member approval a regime for regulating payment of financial benefits to directors of public companies NOT Replaceable Rule The requirements of Ch 2E cannot be overridden by the constitution 8/15/17 RMIT University Vietnam Slide 47 Duties of Directors 3 Basic prohibition - s 208 Prevents a public company from giving a financial benefit to a director or other related party of a public company Prevents an entity it controls from doing the same Unless approved by members in general meeting AND benefit given within 15 months 8/15/17 RMIT University Vietnam Slide 48 Duties of Directors 3 What is financial benefit? S 229: It may be non-monetary (giving assets, leasing assets) and indirect or informal Who is a Related party? Defined in s 228, including Controlling entity of the public company; A director of the public company; a spouse or de facto spouse of such a director or person; parents, children. 8/15/17 RMIT University Vietnam Slide 49 Duties of Directors 3 When member approval not required Reasonable remuneration to company officers Advances to a director or their spouse or de facto spouse of up to $5,000 Consequences of contravention Breach of s 208 does not invalidate the transaction: s 103 Civil penalty provisions 8/15/17 RMIT University Vietnam Slide 50 Duties of Directors 4 4. DUTIES OF CARE, SKILL AND DILIGENCE Current Standards- Duty of Care and Diligence . s. 180(1) & common law negligence & fiduciary substance of duty imposed are the same, remedies different. . s 180(1) applies to Directors and Other 'OFFICERS' . Includes secretary, executive officer, receiver, receiver and manager, administrator, liquidator, trustee, etc. 8/15/17 RMIT University Vietnam Slide 51 Duties of Directors 4 \" Directors and other officers must exercise their powers and discharge their duties with the degree of care and diligence that a reasonable person would exercise if they were a director or officer of a corporation in the corporation's circumstances; and occupied the office held by, and had the same responsibilities within the corporation as the director or officer.\" 8/15/17 RMIT University Vietnam Slide 52 Duty of care, skill and diligence- Con't Subjective element: \" In the corporation's circumstances\" Urgency and magnitude of problem faced by the co, financial affairs, size and business, constitution, composition of board. 8/15/17 RMIT University Vietnam Slide 53 Duty of care, skill and diligence- Con't Subjective element: \"Responsibilities\" Take account of special background, qualification, management responsibility of officer. (ASIC v Rich, ASIC v MacDonald) To some extent, the subjective skills/ability/background come into consideration. Eg if director was appointed BECAUSE of his special skills and expertise. (Gamble v Hoffman) 8/15/17 RMIT University Vietnam Slide 54 Duty of care, skill and diligence- Con't Objective elements: a Reasonable Person Standard of Care of Executive directors Should take reasonable steps to place themselves in a position to guide and monitor the management of company. 8/15/17 RMIT University Vietnam Slide 55 Duty of care, skill and diligence- Con't Continuing obligations to make inquiries & keep informed. must review the co.'s financial statements and inquire into matters in those statements which call for inquiry. can not shut their eyes to misconduct. Standard of care for Non-Executive directors not as high as executive directors. 8/15/17 RMIT University Vietnam Slide 56 Continued... * Daniels v Anderson1995 Facts: AWA Ltd allowed middle level manager Koval to handle AWA's trading on the foreign exchange. Koval hid losses of $50 million from directors, Koval carried out unauthorized borrowings. Auditor did not detect. Gave warning to directors but did not say it was that bad or that urgent. AWA sues auditor, Auditor counterclaims that AWA was contributorily negligent. 8/15/17 RMIT University Vietnam Slide 57 Continued... Court held: Auditor negligent. AWA's executive directors also negligent. AWA's non-executive directors were NOT negligent. Executive / Non-executive Directors have different Standard of Care 8/15/17 RMIT University Vietnam Slide 58 Continued... Non-exec directors are only expected to decide on matters of policy, not day-to-day running of business. Not liable for corporate management failings. Because they are not paid, only attend a meeting every mth or so. Executive directors should be subject to a higher standard of care, by reason of their contractual employee status. 8/15/17 RMIT University Vietnam Slide 59 Contravention of Duty of Care, Skill and Diligence s.180(1) is a Civil Penalty Provision. s.1317E Court may make orders to : disqualification for a period; (this is not avail under general law) pay the Cth a pecuniary penalty of up to 2000 penalty units. the court may order compensation to co. if there is loss suffer. (similar to damages/eq compensation) 8/15/17 RMIT University Vietnam Slide 60 Contravention of Duty of Care, Skill and Diligence s.180(1) does NOT give rise to criminal liability - unlike other duties. \"negligence\" is not dishonest. 8/15/17 RMIT University Vietnam Slide 61 Defences to s.180- 1 Business judgment rule S. 180(2) : not liable if Judgment is made in good faith for a proper purpose No material personal interest Directors were informed Rationally believed that the judgement is in the best interests of the corporation. 8/15/17 RMIT University Vietnam Slide 62 Defences to s.180- 1 S.180(3) - definition of \"business judgment' : any decision to take or not take action in respect to a matter relevant to the business operations. 8/15/17 RMIT University Vietnam Slide 63 Defences to s.180- 1 Reliance s 189: - reliance on Reliable and competent employee; Professional advisor or expert Another director A committee of directors Must act in good faith, reliance on reasonable grounds. 8/15/17 RMIT University Vietnam Slide 64 Duties of Directors 5 Directors can not delegate functions of the board except to the extent permitted by the Constitution or by s 198D. S 198D allows directors to delegate any of their powers to a committee of directors; OR a director; OR an employee OR any other person; unless the Constitution states otherwise. 8/15/17 RMIT University Vietnam Slide 65 Duties of Directors 5 S. 190(1) - if directors delegate a power under s 198D, they are responsible for the exercise of the power S 190(2) - defence 8/15/17 RMIT University Vietnam Slide 66 Duties of Directors 6 Duty not to prejudice creditor's interests Duty to act in good faith in the best interest of the co when insolvent this duty is to act in the best interest of the creditors. 8/15/17 RMIT University Vietnam Slide 67 Duties of Directors 6 Examples of breach: Co lending money at less than market rates (Ring v Sutton) Loans made with no prospect of repayment (Walker v Wimborne) 8/15/17 RMIT University Vietnam Slide 68 Duties of Directors 7 Statutory duty to prevent insolvent trading s 588G The person is a director of the company when it incurs a debt The company is insolvent at that time, or becomes Insolvent by incurring that debt or debts including that debts 8/15/17 RMIT University Vietnam Slide 69 Duties of Directors 7 There are reasonable grounds for suspecting the company is insolvent or would so become insolvent The director is aware that such grounds exist or a reasonable person in a like position in a company those circumstances would have been so aware the director fails to prevent the company from incurring the debt (588G(2)) 8/15/17 RMIT University Vietnam Slide 70 Duties of Directors 7 Definition of insolvency s 95A(2) - A person who is not solvent is insolvent s 95A(1) - A person is solvent if, and only if, the person is able to pay all the person's debts as and when they become due and payable 8/15/17 RMIT University Vietnam Slide 71 Defences s 588H (2) : the director had reasonable grounds to expect and did expect the company was solvent and would remain solvent; or s 588H (3)the director reasonably believed (delegation) A competent and reliable person was keeping him/her adequately informed about the company's solvency, and On the basis of that information expected that the company was solvent and would remain so s.588H(4) the director did not take part in management of the company when the debt was incurred because of illness or other good reason 8/15/17 RMIT University Vietnam Slide 72 Defences s.588H(5) the director took all reasonable steps to prevent the company incurring the debt Consequences of a contravention Civil penalty : disqualification, pecuniary penalty order A director may be liable to compensate the company / liquidator 8/15/17 RMIT University Vietnam Slide 73 Defences The liquidator may take action to recover as a debt to the company loss or damage suffered by the unsecured creditors at general law. In limited circumstances individual creditors can sue the director If the contravention is dishonest, the director face criminal penalties 8/15/17 RMIT University Vietnam Slide 74