University of Western Sydney Law Review
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JASON HARRIS[*]
One feature of the recent turbulent economic times has been an ongoing debate about standards of corporate governance and what role regulation can, and should, have in the economy. Some have called for greater regulation of corporate directors and managers, whist others have complained of over-regulation. Although much of the discussion has centred on the structuring of executive and board remuneration, related party transactions, and the structure and composition of corporate boards, a broader issue relates to the appropriateness of current levels of liability that directors and company officers face. Finding the optimal level of liability to be imposed on company directors and officers has been flagged as a major issue by all stakeholders, including politicians, enforcement officers, law reform agencies and business lobbyists.[1] Much of this concern is directed towards the complex, overlapping state and federal laws that operate to impose personal liability on company directors and managers for a wide variety of statutory contraventions.[2] However, the question of when, and how, directors and officers should bear responsibility for contraventions of the law during the course of their stewardship remains pertinent. Indeed, a recent review by the Commonwealth Treasury has been investigating this very question. That review has raised the possibility of extending existing defences for directors and officers, or of introducing new general defences.
This short note has a much more limited focus, which is to examine recent decisions regarding the scope of the court’s power to relieve directors and officers from liability arising out of a breach of their statutory and general law duties. The purpose of this discussion is to consider how the court’s statutory relief power may be used to address some of the concerns of over-regulation that have been raised by the business community. In the author’s view, it may be that the court’s power to grant relief from liability can provide sufficient flexibility to reduce the need (if any) to increase defences for directors and officers under the Corporations Act 2001 (Cth).
The scope of the relief power has been almost totally ignored in the debate about corporate governance and directors’ liability. This note seeks to critically assess the role of the court’s relief powers by discussing two recent important judicial decisions that may point to a broader role for the court’s relief powers. The judicial reasoning in these recent decisions will be critically assessed and the implications of these decisions for the future role of the court’s relief powers will be discussed.
The structure of this note is as follows: Part II provides an overview of the current scope of director and officer liability under both state and federal statutes, and the general law. Part III examines the scope of the court’s power to relieve directors from liability. Part IV discusses recent decisions that have the potential to expand the scope of the court to grant relief for a broader range of liabilities faced by company directors and managers. Part V concludes the note and considers proposals for law reform.
II. THE SCOPE OF THE DIRECTOR AND OFFICER LIABILITY
Before considering the nature of the court’s power to relieve directors and officers from liability it is important to appreciate how liability may be imposed on those individuals. Liabilities may be imposed on company directors and officers from three different sources:
1. the Corporations Act 2001 (Cth) (‘the Act’)
2. other statutory provisions; or
3. general law obligations
Each of these sources of liability will be outlined below.
A. Liabilities under the Corporations Act 2001 (Cth)
The Act imposes a range of civil and criminal liabilities on company directors[3] and officers.[4] Various requirements under the Act impose civil liability on company directors and other officers.[5] The primary liabilities arise under a duty:
1. to act with due care and diligence,[6]
to act in good faith in the best interests of the company and for a proper purpose,[7]
to not misuse one’s position within the company,[8] and
To not misuse information obtained because of their position as a director or officer of the company.[9]
These duties may give rise to civil liability through enforcement by the company or by the Australian Securities and Investments Commission (‘ASIC’).[10] Statutory duties for company directors and officers have existed in Australia since 1958 and serve a public interest function, at least when enforced by ASIC, a publicly funded government regulator.[11]
Persons who occupy the specific position of director, and not merely company officers, are also subject to potential liability for insolvent trading where the company incurs debts at a time when it was insolvent and a reasonable person would suspect that the company was insolvent.[12]
The contravention of any of these obligations may give rise to civil penalties under Corporations Act 2001 (Cth) Pt 9.4B.[13] These provisions designate certain requirements to be ‘civil penalty provisions’,[14] including all of the statutory directors and officers duties outlined above. The finding of a court that a person has contravened a civil penalty provision may allow ASIC to ask the court to issue a declaration of contravention under Corporations Act 2001 (Cth) s 1317E. The issue of a declaration may itself lead to the further imposition of a pecuniary penalty order,[15] or a disqualification order[16] to prevent the person managing a corporation.[17]
The Act may also impose civil liability on directors and officers in situations where it is the company that has contravened the provision but the director or officer was ‘involved in the contravention’.[18] For instance, many of the recent securities class actions that have been launched against major Australian corporations such as Aristocrat, Multiplex and Telstra have been based on alleged failure to comply with the continuous disclosure obligations under s 674(2). Although none of these actions has involved litigation against the directors, s 674(2A) allows for personal liability to be imposed where a person is involved in the contravention.[19]
The Act also imposes criminal liability in certain situations, usually where a contravention of a requirement or prohibition under the Act has occurred with additional factors, such as intention or recklessness.[20] The Criminal Code Act 1995 (Cth) Chapter 2 applies to the interpretation of the various criminal provisions that arise under the Corporations Act 2001 (Cth).[21] The majority of provisions under the Act that impose obligations may give rise to criminal sanctions, unless they are specifically excluded from giving rise to criminal liability.[22] With the exception of the duty of care and diligence, each of the directors’ and officers’ duties under Pt 2D.1 and the insolvent trading provision, discussed above, may give rise to criminal liability for individuals.[23]
B. Liabilities under other statutes
Company directors and officers are also subject to a wide variety of statutory liabilities under state and federal laws, including those dealing with environmental liability, occupational health and safety and tax laws. The extent of personal liability imposed on company directors and officers was the subject of a detailed enquiry by the Corporations and Markets Advisory Committee (‘CAMAC’), which advocated in its September 2006 Report that a more consistent approach was needed between state and federal laws related to personal liability of directors and officers. As CAMAC identified, a major problem with these liability laws is that they often impose differing standards, defences and penalties, which creates uncertainty and risks for corporate managers and directors. This is particularly problematic when the liability is often automatically imposed, unless the individual can establish a relevant defence.
Although the government has announced that it will attempt to harmonise these (often inconsistent) laws and try to simplify the rules of liability,[24] no action has yet been taken. One possibility of addressing the minefield of potential personal liabilities is to use the general relief provision in the Corporations Act 2001 (Cth), which will be discussed below in Pt III and Pt IV.[25]
C. Liabilities under general law
The statutory duties imposed on company directors and officers under the Corporations Act 2001 (Cth) largely mirror the long-established duties that arise under both common law and equitable principles. For example, the duty of care and diligence imposed on directors and officers under s 180(1) is also imposed under common law principles of negligence[26] and a similar equitable obligation.[27] The general law duties work side by side with the statutory duties.[28]
There are also fiduciary duties imposed on directors and senior executives (who stand in a fiduciary capacity) to act in good faith in the best interests of the company and to act for a proper purpose. Directors and other fiduciaries also have a duty to avoid conflicts of interest and to not misuse their position or information to gain an advantage for themselves by diverting business opportunities or making secret profits. These equitable principles are mirrored in the Corporations Act 2001 (Cth) ss 181-183, 191-195.[29]
There are some subtle differences between the general law and statutory duties, particularly with respect to their scope beyond directors and senior executives. For example, statutory duties not to misuse one’s position or to misuse information operate over directors, officers and employees, whereas equitable fiduciary obligations did not extend beyond the fiduciary.[30] There are also differences between general and statutory duties relating to the enforcement of these duties, with ASIC enforcing statutory duties but not general law duties, and the company being capable of enforcing both categories of duties. Compliance with obligations under the Corporations Act 2001 (Cth) may also be enforced by a statutory injunction obtained from the court by any person whose interests have been affected by the conduct giving rise to the contravention.[31]
Having given an overview of the various statutory and general law duties that directors and company officers may face, it is now appropriate to discuss when relief may be obtained from liability. Part IV will then examine recent cases to discuss the current and future role for the court’s power to grant relief from liability.
A. Classification
Before examining the scope of relief from liability it is important to identify what is meant by ‘relief’. In particular, it is important to distinguish relief by the court from other forms of avoidance of liability.
Firstly, a defendant director or officer may have a ‘defence’ available to avoid liability. The most well known defence is the statutory business judgment rule in Corporations Act 2001 (Cth) s 180(2), which provides:
Business judgment rule
(2) A director or other officer of a corporation who makes a business judgment is taken to meet the requirements of subsection (1), and their equivalent duties at common law and in equity, in respect of the judgment if they:
(a) make the judgment in good faith for a proper purpose; and
(b) do not have a material personal interest in the subject matter of the judgment; and
(c) inform themselves about the subject matter of the judgment to the extent they reasonably believe to be appropriate; and
(d) rationally believe that the judgment is in the best interests of the corporation.
The director's or officer's belief that the judgment is in the best interests of the corporation is a rational one unless the belief is one that no reasonable person in their position would hold.
This defence therefore allows directors and officers to avoid liability for breach of the duty of care and diligence by preventing certain conduct from amounting to a breach of that duty.[32] The business judgment rule has been rarely used in Australian corporate law.[33] There have however been recent suggestions that the defence may be extended to cover other directors’ and officers’ duties under the Act.[34] The underlying motive behind such suggestions appears to be a concern expressed by business lobby groups that company directors feel overregulated and many good candidates may be reluctant to take on board positions.[35] In the writer’s view, if it were clear that the court’s power to grant relief could be used where directors and officers had acted reasonably and engaged in a responsible process of decision making based on appropriate due diligence, then there may be no need to complicate existing liabilities by extending the business judgment rule. This will be discussed below in Pt V.
The directors’ duty to avoid insolvent trading allows a range of defences as outlined in Corporations Act 2001 (Cth) s 588H. These defences are interpreted consistently with the broader set of obligations imposed on company directors.[36] There are also specific statutory defences for particular liability provisions, such as the due diligence defences applicable to liability arising from defective disclosure practices.[37]
Ratification by a general meeting obtained after full disclosure to the company’s members may provide a defence in respect of general law fiduciary duties.[38] Ratification is available in respect of both the duty of care[39] and fiduciary duties.[40] Ratification does however not provide a defence to a breach of statutory duties,[41] although the fact that a director or officer acted after obtaining ratification will be relevant for determining whether the person acted improperly.[42]
Secondly, a director or officer may, in theory at least, be indemnified by the company or insured against having to pay liability in respect of breach of duty. In practice it is common for directors’ and officers’ insurance policies to have specific exclusions relating to directors liability to the company.[43] Furthermore, the Corporations Act 2001 (Cth) prohibits blanket indemnifications by the company for directors in respect of liability to the company.[44] The Act also limits the ability of the company to pay for insurance premiums for directors that cover liability in respect of wilful breaches of duty or contraventions of ss 182 or 183.[45]
Relief from liability is different from defences as it arises at the end of the litigation process, after the court has found that the defendant has breached their statutory or general law obligation.[46] Relief also serves a qualitatively different function from insurance and indemnification, as it requires the court to form the view that although in breach of their obligation, the defendant should not have to bear some or all of the responsibility for the consequences of that breach. We will now examine the nature of the court’s power to grant relief.
B. Relief
The court has the power to make an order granting relief from liability in two situations: firstly, in respect of liability arising under the civil penalty regime;[47] secondly, a general power to relieve from liability arising out of ‘negligence, default, breach of trust or breach of duty’.[48] The provisions do not operate to remove the breach but rather as a dispensing power excusing the contravener.[49] They therefore operate only on past and not future potential, contraventions.[50] Any differences between the two provisions do not affect the substantive role of the court as the relevant considerations are the same.[51] The power to grant relief extends both to claims brought by the company and third parties against the directors and officers.[52] Relief cannot be given in respect of criminal liability.[53]
In both situations, the defendant director bears the onus[54] of satisfying the court that the defendant
has acted honestly and that, having regard to all the circumstances of the case, including those connected with the person's appointment, the person ought fairly to be excused … [and] the court may relieve the person either wholly or partly from liability on such terms as the court thinks fit.[55]
The scope of these requirements is discussed further below.
The power of the court to grant relief from liability has a long history. The provision was first introduced into corporate law statutes in 1907 in England,[56] having been based on similar amendments made to trustee legislation in 1896.[57] The original English provision was confined to granting relief from general law liability, and did not extend to liability under statute law. This was changed in 1929 to what is largely the current wording.[58] However, directors’ and officers’ duties in England and Australia diverged in the late 1950s when Victoria enacted the first statutory duties on directors in the Companies Act 1958 (Vic). England has traditionally had mainly general law duties (aside from issues such as insolvent trading), and has only introduced statutory duties of care and diligence and loyalty in its recent Companies Act 2006 (UK).[59] Furthermore, the broader statutory enforcement framework differs as the Corporations Act 2001 (Cth) provides for a detailed set of civil penalty provisions compared with the UK law.[60]
The purpose of the relief provisions is
to excuse company officers from liability in situations where it would be unjust and oppressive not to do so, recognising that such officers are businessmen and women who act in an environment involving risk in commercial decision-making. [61]
The provisions serve the public interest by balancing the need to make directors accountable for their conduct, whilst not deterring able people from offering their services for want of appropriate protection.[62] It is not the case that the power to grant relief should only be used in extreme circumstances of injustice or oppression.[63]
Section 1317S only applies to ‘eligible proceedings’ which are proceedings (other than for the commission of an offence) in respect of civil penalty provisions.[64] Section 1318 applies to civil proceedings against a person for negligence, default, breach of trust or breach of duty, although the section contemplates that proceedings may not have yet commenced but are anticipated.[65] There is clearly a difference between conduct having already occurred without proceedings having commenced and an application for relief in respect of future conduct, which is not permitted.[66]
It is appropriate to consider how the relief provisions have been interpreted. Given the common elements the decisions will not be separated into those under s 1317S and those under s 1318.
1. Honesty
The meaning of the phrase ‘to act honestly’ has been considered in many decisions. Decisions concerning the relief provisions and their predecessors have consistently stated that it is impossible to formulate a general test to prove honesty. This is because proof of honesty is based on a subjective assessment of the defendant that will differ in each case.[67]
Clearly, if a defendant knew that his or her conduct contravened the law, or had an intention to deceive or defraud others (including the company’s unsecured creditors)[68] they would be unable to establish that they acted honestly.[69] It has been said that to act honestly is to act in a subjective state free from any intention to deceive or defraud.[70] It is clear that conduct exhibiting moral turpitude may be said to be dishonest.[71] However, it is not necessary to establish that the defendant knew they were contravening the law to support a finding that they failed to act honestly.[72] Nor is it necessary to prove an intention to deceive or defraud in order to fail to establish honesty.[73]
A finding of honesty will not be established merely by the failure of the court to declare that a defendant’s conduct was dishonest.[74] In a significant recent decision (which is examined in more detail below), the use of the term honesty was criticised on the basis that a default or breach of duty by a director or officer of their legal obligations did not accord with the ordinary meaning of honesty. As Palmer J said in that case:
In my opinion, courts should not describe as ‘dishonest’ or ‘fraudulent’ conduct which would not attract those descriptions in ordinary usage. A judge’s choice of words in a judgment can blight a person’s reputation.[75]
Justice Palmer went on to clarify what, in his view, was meant by honesty:
the question [is] … whether the person has acted without deceit or conscious impropriety, without intent to gain improper benefit or advantage for himself, herself or for another, and without carelessness or imprudence to such a degree as to demonstrate that no genuine attempt at all has been to carry out the duties and obligations of his or her office imposed by the Corporations Act or the general law.[76]
2. Ought fairly to be excused
It is important to consider the way in which the breach occurred,[77] including the seriousness of the contravention.[78] Of course, the court is not limited to those considerations alone.[79] The courts, it has been said, have a wide discretion to relieve in whole or in part.[80] The notion of forgiveness being ‘fair’ in the circumstances requires consideration of the effect of the contravening conduct for which the forgiveness is sought. There is substantial public interest in publicly condemning misconduct by refusing relief for conduct that clearly breaches the requirements of the law. This may be contrasted where the conduct of the defendant was merely inadvertent.[81] Reckless behaviour will not support the court granting relief from liability.[82] The presence or absence of contrition by the defendant is also a relevant consideration.[83]
Whether the director gained a personal benefit from the transaction will be a relevant consideration in determining whether relief ought fairly to be given.[84] Similarly, where the director has also been harmed by the conduct it will be taken into account.[85]
Where the defaulting director acted reasonably this may weigh in favour of granting relief.[86] Reasonableness may be better proved where the director has received independent advice before entering the transaction,[87] and where that advice was reasonably relied upon in the circumstances.[88] A defendant acting under instructions given within the scope of his employment may be granted relief.[89] It is possible that a director or officer may be granted relief from liability in respect of the duty of care (which involves acting unreasonably) and yet still obtain relief from the court.[90]
A lack of insurance coverage is not a sufficient reason for the director or officer to be granted relief,[91] nor is the fact that the defendant may be unable to satisfy the judgment debt awarded against him.[92] A small or negligible return from litigation, due to the existence of a litigation funding agreement which could consume over half of any eventual recovery, is also not a relevant consideration for determining whether to grant relief from liability.[93]
IV. EXPANDING THE SCOPE FOR RELIEF?
Although the relief provisions have a long pedigree, they have only been rarely used successfully.[94] There are different ways to interpret the relatively low incidence of successful applications under either ss 1317S (for civil penalties) or s 1318 (for other liabilities). On one view, this may demonstrate an inadequate safety net that fails to properly protect directors and officers from hindsight review. On another view, it may be that actions are not often brought to court where there is a reasonable possibility that a defendant may succeed in obtaining relief from the court, in which case the provisions may well be seen as successful in protecting directors and officers from unnecessary litigation.
In the author’s view, two recent (and yet contrasting) decisions in New South Wales may point the way to a broader role for the court’s relief powers. It is submitted that the reasoning in these two decisions may provide some scope for ameliorating the perception that directors and officers are over-regulated through the use of the court’s relief power.
A. Deputy Commissioner of Taxation v Dick[95]
1. Facts
This case concerned the liability of a company director under tax laws for the company’s failure to remit PAYG tax instalments to the Commissioner of Taxation in respect of employee wages over a nine- month period. Directors may have personal liability for unpaid corporate taxes unless they take certain steps, which may involve entering into a compromise with the Tax Office or putting the company into liquidation or voluntary administration. Dick was a director of a company during a time when it failed to comply with these obligations under the tax laws and the Deputy Commissioner took action to recover the unpaid amounts from Dick.
Dick responded by seeking to establish a defence under the tax laws that he had not taken part in the management of the company at the time when the tax obligations were incurred because of illness or for some other good reason.[96] This argument was dismissed at trial as Dick was found to have taken part in the management despite failing to be involved in the company’s financial affairs.[97]
Relevantly, for present purposes, Dick also sought a court order granting relief from liability under Corporations Act 2001 (Cth) s 1318. This was accepted at trial where Judge Johnstone found that Dick should be excused from liability owing to a range of personal factors (such as his community service) and Dick being shut out and deceived by other directors. The Deputy Commissioner appealed.
2. Findings
The Deputy Commissioner’s appeal was upheld. Spigelman CJ held that the words default and breach of duty should be confined to contraventions of the Corporations Act 2001 (Cth) or breaches of the general law, and could not extend to contraventions of other statutory regimes.[98] His Honour’s reasoning was based on a range of factors including the adverse impact on the administration of the Revenue, as well as the historical development of the relief provisions and their original limitations to actions brought in respect of liability owed by directors to the company.
Basten JA found that s 1318 could not operate consistently with the regime of enforcement and defences found in the Income Tax Assessment Act 1936 (Cth). Where the parliament had deliberately created grounds to resist liability, it was not to be swept away by a general corporate law relief provision, at least not without a clear parliamentary intention.[99]
Although Santow JA’s reasoning concurred with the other members of the court in the result of the appeal, the process of reasoning was quite different, particularly from the reasons given by the Chief Justice. For Santow JA, there was nothing about s 1318 that meant it should be strictly confined to liabilities arising under company law.[100] On the face of it, his Honour found that liability to pay tax debts owed by the company because of one’s position as a director at the time the debts were incurred gave the liability a ‘corporate character’ that brought it within the potential scope of s 1318.[101] However, his Honour found that the nature of the tax provisions impliedly excluded any scope for s 1318. Put simply, by providing a set of conditions and limitations on conduct the tax statute had impliedly excluded the operation of a more general provision such as s 1318.[102] As Santow JA said:
[T]he effectiveness of those penalty provisions under the [tax statute] would be entirely subverted if the person concerned, though unable to prove that he or she ‘took all reasonable steps to ensure that the directors complied with the relevant statutory provisions’ [as required by the defence in the statute], could yet seek and obtain relief under s 1318. [103]
Santow JA also considered, albeit in obiter, that it would not have been appropriate to excuse Dick from liability given that he was aware of the company’s financial troubles but took no action to address those troubles.
Although the Dick case determined that particular liabilities under the tax statute could not be relieved under Corporations Act 2001 (Cth) s 1318, the reasoning of Santow and Basten JJA leaves open the door to argue that other statutory liabilities imposed on directors and officers outside of the Corporations Act 2001 (Cth) may be relieved by the provision. This is significant to the debate concerning the perception of over-regulation as it may allow the court’s relief powers to be used for liability arising outside the Corporations Act 2001 (Cth). Of course, any such argument will need to establish that the liability provisions in the other statute operate consistently with the Corporations Act 2001 (Cth) s 1318.
Perhaps of even greater significance for directors and officers seeking to obtain relief is the decision in Hall v Poolman,[104] where the court applied a commercial realities approach to an application for relief from liability. This decision has generated a high degree of interest in the business community and in the author’s view, points to an increasing scope for the court’s relief powers to be exercised which may reduce business concerns about over-regulation.
B. Hall v Poolman
1. Facts
This case concerned the collapse into insolvency of the Reynolds group of wine companies. The case comprised two main companies in the group, Reynolds Wines and Reynolds Vineyards (hereafter ‘Wines’ and ‘Vineyards’). The Chairman of both companies was Mr Irving, a very experienced and well-known company director and investment banker. The first defendant was Mr Poolman, the deputy chairman of Wines and a director of Vineyards, although at the time of the trial he was an undischarged bankrupt and his trustee in bankruptcy took little involvement in the case. The litigation largely concerned the conduct of Mr Irving.
The case involved several claims involving the directors, including liability for insolvent trading against the Chairman and Deputy Chairman, as well as claims by them for equitable contribution from the other directors. The case also included a claim by the Commissioner of Taxation against the directors to be indemnified in respect of tax payments made by the companies shortly before liquidation which were claimed by the liquidators as unfair preferences.
The case revolved around a dispute between the Reynolds companies and the Australian Taxation Office. The Commissioner of Taxation had issued notices of assessments against Wines for approximately $5.5 million. The assets of Wines consisted almost entirely of an inter-group debt owed to it by Vineyards for over $33 million. Vineyards itself was insolvent with some $4.5 million deficiency in its assets and had no way of repaying the loan to Wines. Wines immediately objected to the assessment and obtained professional assistance from experienced insolvency and restructuring partners with accounting firm Deloitte. Even apart from the tax assessment debt, Wines and Vineyards had a total of approximately $4.6 million in unpaid debts during the relevant period.
Mr Irving accepted that if the disputed tax debts were taken into account Wines was certainly insolvent and could not have repaid its creditors after the tax assessments. Much of the case turned on when, and whether Wines became insolvent. The court found that the company was insolvent after the issue of the tax assessments which was known by the company’s directors, who had failed to prevent the company continuing to incur debts during its insolvency. It is clear that genuinely disputed tax debts are still debts and should be taken into account in determining the company’s solvency.[105]
One aspect of the case that raised the court’s concern was the role played by litigation funders. The liquidators had obtained a litigation funding agreement to support the case. However, the huge costs involved in running the case and the funder’s success fee meant that there was little money left for creditors. The Reynolds companies were hopelessly insolvent and the return from the litigation meant at best, only an increase of a few cents in the dollar for the group’s unsecured creditors. As Palmer J noted: ‘The true beneficiaries of this huge piece of litigation are a litigation funder, the liquidators and their lawyers, not the creditors.’[106] The conduct of the litigation has led the court to conduct its own investigation of the liquidators’ conduct.[107]
2. Findings
The court found that the directors (including Mr Irving) had allowed the company to trade during a time when reasonable directors would have been aware of grounds to suspect the company’s insolvency.[108] The directors also failed to establish any defence against liability for insolvent trading.[109] For present purposes, the key findings relate to Mr Irving’s application for relief from liability under ss 1317S and 1318.
Justice Palmer first discussed the relationship between both relief provisions. His Honour rejected what he called ‘a rather sterile argument’ as to whether s 1318 applied to liability for insolvent trading, or whether the power to grant relief was confined to s 1317S due to the insolvent trading provision being a civil penalty provision.[110]
His Honour considered whether Mr Irving should be granted relief from liability for insolvent trading, even though he was aware that the company was insolvent. His Honour’s starting point is significant for the present discussion:
It is sometimes a difficult decision for a director of a trading corporation suffering from liquidity problems to decide whether, and when, to abandon hope of a change in the company’s fortunes and to summon the administrators. There are often pressing interests involved in the decision: the jobs of employees will be lost, the investment of shareholders will evaporate, and a promising venture in which a great deal of personal effort may have been expended will end in failure. On the other hand, the livelihood of creditors whose businesses depend on reasonably prompt payment may also be ruined if a company continues to trade while insolvent. When confronted with the necessity of making a decision involving these factors, a director cannot afford to procrastinate or to avoid confronting realities. He or she must ask and honestly answer [hard questions regarding how, and when, the company will be able to pay its debts].[111]
This passage demonstrates that the court is prepared to be flexible in its application of the insolvent trading provisions. This is consistent (albeit a more explicit statement) with judicial consideration of the concept of corporate insolvency. In recent years, the courts have developed an approach of ‘commercial reality’ which takes into account all of the circumstances of the company and aims not to allow a temporary cash flow problem to condemn the company to legal insolvency (and the adverse legal consequences that may follow for directors involved).[112] As his Honour noted:
Experienced company directors such as Mr Irving would appreciate that, in some cases, it is not commercially sensible to summon the administrators or to abandon a substantial trading enterprise to the liquidators as soon as any liquidity shortage occurs. In some cases a reasonable time must be allowed to a director to assess whether the company’s difficulty is temporary and remediable or endemic and fatal. The commercial reality is that creditors will usually allow some time for payment beyond normal trading terms, if there are worthwhile prospects of an improvement in the company’s position.[113]
In this case, the directors had made a reasonable attempt to save the company by engaging experienced restructuring professionals from Deloitte to act on their behalf in negotiating with the Tax Office. As his Honour said:
I accept that reasonable commercial people could decide to wait to see whether the written submission lodged by Deloitte with the ATO on 15 November 2002 produced a quick and positive response such as to enable an asset sale programme and a restructuring to restore solvency to the Reynolds Group. I accept that if a quick and positive response from the ATO had been received, the group could have set about a restructuring which very probably would have restored solvency.[114]
His Honour found that Mr Irving acted honesty and ought fairly to be excused from liability from the insolvent trading up until it became clear that the negotiations with the tax office could not be resolved quickly. His Honour found that at a meeting on 5 February 2003 between the company, its advisors and the ATO, it was clear that the matter would be ongoing for at least another 3 months, with no certainty of a positive outcome. It had to be borne in mind that many of the company’s debts were already 3 months or more overdue. Thus, having attempted (seemingly in vain) to save the company in the short term by negotiating with the ATO, without any positive signs of potential success, it would have been clear to a reasonable director that trading could not go on indefinitely.
Palmer granted relief to Mr Irving for the period of insolvent trading up until 5 February 2003. He was liable for debts incurred after that date, including the obligation to indemnify the Commissioner of Taxation in respect of tax payments made after that date, which were subsequently recovered by the liquidator as unfair preferences.[115] This finding is significant because it demonstrates that the court is prepared to grant relief where directors and officers act reasonably. The relief provisions provide an appropriate safety net where enforcement action would impose an unduly harsh sanction through hindsight assessment. As his Honour said:
[Mr Irving’s] judgment was made in very difficult circumstances; it was made in the knowledge that a large and potentially profitable public company could be placed in liquidation simply because the ATO did not seem to be dealing with a commercial settlement proposal with any degree of expedition. What if the [the company were placed into voluntary administration] and the Reynolds Group collapsed, only to be told days later that the ATO agreed to settle the dispute on favourable terms? It is not hard to envisage the directors’ sense of frustration in such circumstances.[116]
It is also important to emphasise his Honour’s clarification of the scope of the term ‘honesty’ as used in the relief provisions. As noted above, Palmer J refused to equate ‘honesty’ with the ordinary meaning of the term. His Honour was particularly concerned about the pejorative use of any finding of dishonesty or a lack of honesty. His Honour noted that where a failure to consider the interests of the company as a whole, including the interests of its creditors is caused by an error of judgment ‘no finding of failure to act honestly should be made, but the failure must be taken into account as one of the circumstances of the case to which the court must have regard’[117] This finding is a welcome development for directors and officers as it recognises the reputational harm that may be done by a court finding of a lack of honesty but maintains sufficient flexibility to nonetheless refuse relief where it is not appropriate.
The decision in Hall v Poolman should be a welcome development for company directors and officers. The decision examined liability for decisions made by experienced businesspeople years earlier in times of financial hardship. The pressure of the circumstances made the decision to trade on whilst pursuing a resolution of the dispute with the tax office a difficult one. However, the limited relief granted to the directors reaffirms that liability under the Corporations Act 2001 (Cth) for insolvent trading will only be imposed where it should have been clear that the company’s position was untenable. Directors and managers will be given a limited amount of time to turn things around, provided that there are reasonable prospects of doing so. This is a much needed development in corporate law at a time when issues of potential insolvent trading liability will be raised increasingly in the near future as the failure of major businesses due to a changing economic climate will generate a demand for blame to be attributed to corporate managers.
These turbulent economic times require responsible regulation, lest legal uncertainty caused through the threat of litigation encourages corporate managers to be more cautious than necessary. As ASIC Chairman Tony D’Aloisio said in a speech to the Australian Institute of Company Directors in November 2007:
it may be time for a stocktake in [the area of directors’ liability]-to assess the balance between ensuring our boards take risks (so that our economy keeps growing) with protection of shareholders and creditors and consumers where individual liability may be appropriate.[118]
The liability of company directors and officers presents a difficult regulatory issue. On the one hand, there is a clear need to establish a system of economic and reputational sanctions that provide a sufficient incentive to drive compliant behaviour and (hopefully) better corporate governance. This system may be enforced on many levels, including by the company, by a liquidator, by creditors (for insolvent trading), by members through a statutory derivative action,[119] and by the publicly funded regulator, ASIC. Establishing a clear and rigorous regulatory framework sends a strong signal to investors to have confidence in the quality of Australian capital markets.
On the other hand, too much regulation may institute excessive sanctions that drive corporate managers and directors to be overly cautious and conservative which could lower economic performance, harm the economy and lower national living standards. The current economic climate requires corporate managers to be courageous, particularly when attempting to reorganise struggling companies during the twilight zone approaching insolvency. Under current laws, the range of liabilities faced by company directors and officers may lead them to think twice about staying on with a company once it begins to struggle financially. There is also the ex ante problem of attracting high quality candidates, who may be otherwise discouraged by potential liabilities, to take on board positions. Whether or not the law is actually inappropriate or over regulating, it is clear that there is a problem of perception within the ranks of Australian company directors and senior managers.
It is submitted that the court’s power to grant relief can provide comfort in these situations. The recent decision in Hall v Poolman should provide considerable comfort to corporate directors and officers that the law will protect decisions made on a commercially reasonable basis.[120] The decision in Deputy Commissioner of Taxation v Dick also provides the possibility that relief may be granted from liability arising under the complex web of state and federal legislation.
Perhaps the problem of directors’ and officers’ liability lies in the uncertainty generated by the variety of decisions on the court’s relief powers.[121] Perhaps this may be addressed by making the operation of the relief provisions clearer. One way of doing this may be to specifically align the court’s relief powers with broader calls for a general due diligence defence. This was previously recommended by the Companies and Securities Law Review Committee in 1990.[122] However, political and judicial developments led to the introduction of a statutory business judgment rule rather than amending the court’s relief powers.[123] Making it clear that the relief provisions were based on due diligence principles, and not merely on the subjective assessment of the court (which is mandated by the primary requirement for relief being ought fairly to be excused), would go a significant way towards reducing fears in the business community about legal liability arising from difficult and uncertain economic times. Of course, it may be argued that directors involved in due diligence are already protected by a range of specific defences.[124] However, offering a diverse range of defences adds further complexity to the system and causes further confusion within corporate boardrooms. A robust relief provision could provide a better response.
[*] BA LLB (UWS), LLM (ANU), Lecturer, Faculty of Law, University of Technology, Sydney. The writer thanks the journal’s referees as well as Michael Murray, James Hayes-Williams and Giles Woodgate for their comments and advice in relation to the issues discussed in this note although the writer retains sole responsibility for the contents of this note.
[1] These concerns led to a review by the Commonwealth Department of Treasury: see Commonwealth of Australia, Department of Treasury, Review of Sanctions in Corporate Law (2007) <http://www.treasury.gov.au/contentitem.asp?NavId=013 & ContentID=1182> at 17 October 2008. At the time of writing Treasury had not yet prepared a formal response to public submissions on its discussion paper issued in March 2007.
[2] See Corporations and Markets Advisory Committee, Personal Liability for Corporate Fault (September 2006) <www.camac.gov.au> at 17 October 2008.
[3] Directors are broadly defined in Corporations Act 2001 (Cth) s 9 to include officially appointed directors, de facto directors and shadow directors. See further Martin Markovic, ‘When Are You a Director When You're not a Director? The Law of de Factor Directors’ (2007) 25 Company and Securities Law Journal 101; Peter Agardy, ‘Who Wants to Be a Deemed Director?’ (2004) 12 Insolvency Law Journal 104.
[4] An officer is broadly defined under Corporations Act 2001 (Cth) s 9 to include a director, various types of external administrators, and a person who makes or participates in making decisions that affect the whole, or a substantial part, of the business of the corporation or who has the capacity to substantially affect the corporations financial standing, or a person in accordance with whose wishes the board of directors are accustomed to acting. See further Australian Securities and Investments Commission v Vines [2005] NSWSC 738; (2005) 55 ACSR 617.
[5] The purpose of this note is not to examine directors’ and officers’ duties in detail, but rather to focus on the role of the court’s power to grant relief from liability. For a detailed discussion of directors’ and officers’ duties see: Robert Austin, Harold Ford and Ian Ramsay, Company Directors: Principles of Law and Corporate Governance (2005). See also the summary of principles in Australian Securities and Investments Commission v Adler [2002] NSWSC 171; (2002) 41 ACSR 72.
[6] Corporations Act 2001 (Cth) s 180(1).
[7] Corporations Act 2001 (Cth) s 181.
[8] Corporations Act 2001 (Cth) s 182.
[9] Corporations Act 2001 (Cth) s 183.
[10] Corporations Act 2001 (Cth) s s1317E, 1317H, 1324.
[11] For a discussion of the history of directors’ duties in Australia and their public interest purpose see Jason Harris, Anil Hargovan and Janet Austin, ‘Shareholder Primacy Revisited: Does the Public Interest Have Any Role in Statutory Duties?’ (2008) 26 Company and Securities Law Journal 355.
[12] Corporations Act 2001 (Cth) s 588G. See further Allens, Arthur Robinson, Directors’ Duties During Insolvency (2nd ed, 2006).
[13] For an analysis of civil penalties see: Michelle Welsh, ‘Adler, Whitlam, Elliott and others: judicial interpretation of the civil penalty provisions of the Corporations Act 2001 (Cth)’ (2005) 18 Australian Journal of Corporate Law 243; Vicky Comino, ‘The enforcement record of ASIC since the introduction of the civil penalty regime’ (2007) 20 Australian Journal of Corporate Law 183.
[14] Corporations Act 2001 (Cth) s 1317E.
[15] Corporations Act 2001 (Cth) s 1317G.
[16] Corporations Act 2001 (Cth) s 206C.
[17] See further Michelle Welsh, ‘Civil penalty orders: assessing the appropriate length and quantum of disqualification and pecuniary penalty orders’ (2008) 31 Australian Bar Review 96.
[18] See Corporations Act 2001 (Cth) s 79.
[19] For a discussion of accessorial liability in relation to continuous disclosure breaches see Angie Zandstra, Jason Harris and Anil Hargovan, ‘Widening the Net: Accessorial Liability for Continuous Disclosure Contraventions’ (2008) 22 Australian Journal of Corporate Law 51. For a discussion of the enforcement of continuous disclosure laws: See Michael Adams, Margaret Hyland and Marina Nehme, ‘Enforcement of continuous disclosure: the use of infringement notice and alternative sanctions’ (2007) 21 Australian Journal of Corporate Law 112.
[20] See for example, Corporations Act 2001 (Cth) s 184. See further Adler v Director of Public Prosecutions [2004] NSWCCA 352; (2004) 51 ACSR 1.
[21] For a discussion of corporate criminal liability see Michael Adams, ‘Does increasing criminality make for better reform of the financial services industry?’ (2002) 14 Australian Journal of Corporate Law 202.
[22] Corporations Act 2001 (Cth) s 1311, Sch 3.
[23] Corporations Act 2001 (Cth) ss 184, 588G(3).
[24] Hon Nick Sherry, Minister for Superannuation and Corporate Law, 'Corporate Governance in Today's Volatile Market Conditions', (Speech delivered at the Riskmetrics Group Australia Governance Conference, Melbourne, 28 April 2008) <http://www.treasury.gov.au> at 17 October 2008.
[25] The purpose of this note is not to discuss in detail the nature of directors’ and officers’ personal liabilities under state and federal laws, but rather to examine the potential use of court powers to grant relief from liability. For a detailed discussion of the approaches to personal liability under state and federal laws see: CAMAC, Personal Liability for Corporate Fault (September 2006), <www.camac.gov.au> at 17 October 2008. See further Michelle Welsh and Helen Anderson, ‘Directors' Personal Liability for Corporate Fault: An Alternative Model’ [2005] AdelLawRw 14; (2006) 26 Adelaide Law Review 299.
[26] Daniels v Anderson (1995) 37 NSWLR 438.
[27] Permanent Building Society (in liq) v Wheeler (1994) 14 ACSR 109, 159 (Ipp J). See further Dyson Heydon, ‘Are the Duties of Company Directors to Exercise Care and Skill Fiduciary?’ in Simone Degeling and James Edelman, Equity in Commercial Law (2005) Ch 9.
[28] Corporations Act 2001 (Cth) s 185.
[29] For a useful summary of these principles see The Bell Group Ltd (in liq) v Westpac Banking Corporation (No 9) [2008] WASC 238 (Unreported, Owen J, 28 October 2008) [20.2.4]; Australian Securities and Investments Commission v Adler (2002) 41 ACSR 72; [2002] NSWSC 171, [735] (Santow J).
[30] Robert Austin, Harold Ford and Ian Ramsay, Company Directors: Principles of Law and Corporate Governance (2005) 394.
[31] Corporations Act 2001 (Cth) s 1324.
[32] There is also a defence in Corporations Act 2001 (Cth) s 189, which deems certain reliance by directors to be reasonable.
[33] Research undertaken by the writer reveals that there is only one decision in Australia where the statutory business judgment rule has been applied, which was an insolvency case involving the potential liability of external administrators as officers of the company: Deangrove Pty Limited (Receivers and Managers Appointed) v Buckby [2006] FCA 212 (Unreported, Branson J, 14 March 2006). In the only two other cases where the rule has been examined, it was rejected: Gold Ribbon (Accountants) Pty Ltd (in liq) v Sheers [2006] QCA 335 (Unreported, Williams and Keane JJA and Wilson J, 5 September 2005); Australian Securities and Investments Commission v Adler [2002] NSWSC 171; (2002) 41 ACSR 72.
[34] See Treasury, Review of Sanctions in Corporate Law, above n 1. For a critique of the statutory business judgment rule see Paul Redmond, ‘The Reform of Directors’ Duties’ [1992] UNSWLawJl 5; (1992) 15 University of New South Wales Law Journal 86; Paul Redmond, ‘Safe Harbours or Sleepy Hollows: Does Australia Need a Statutory Business Judgment Rule’ in I Ramsay (Ed), Corporate Governance and the Duties of Company Directors (1997); Andrew Clarke, ‘The business judgment rule-good corporate governance or not?’ (2000) 12 Australian Journal of Corporate Law 85.
[35] See Australian Institute of Company Directors, ‘Duty of Care and the Business Judgment Rule’, 30 June 1997 <www.companydirectors.com.au> at 17 October 2008.
[36] Deputy Commissioner of Taxation v Clark [2003] NSWCA 91; (2003) 57 NSWLR 113.
[37] Corporations Act 2001 (Cth) ss 731 (defence against liability for prospectus documents), 674(2B) (defence against liability for continuous disclosure breaches).
[38] Although it may be preferable to view this as an estoppel on, or a waiver by, the company of its legal right to sue the fiduciary: Sarah Worthington, ‘Corporate Governance: Remedying and Ratifying Directors’ Breaches’ (2000) 116 Law Quarterly Review 638, 651-656.
[39] Pavlides v Jensen [1956] Ch 565.
[40] Regal (Hastings) Ltd v Gulliver [1967] 2 AC 134; Winthrop Investments Ltd v Winns Ltd [1975] 2 NSWLR 666.
[41] Angas Law Services Pty Ltd v Carabelas [2005] HCA 23; (2005) 226 CLR 507, 524 (Gleeson CJ, Heydon J).
[42] Ibid; ASIC v Maxwell [2006] NSWSC 1052; (2006) 59 ACSR 373. For a discussion of the effect of ratification on the enforcement of statutory duties see Jason Harris, Anil Hargovan and Janet Austin, ‘Shareholder Primacy Revisited: Does the Public Interest Have Any Role in Statutory Duties?’ (2008) 26 Company and Securities Law Journal 355.
[43] Insurance for directors and officers is more typically focussed on third party liability, such as liability to pay compensation for defective disclosure. See further Kim Little and Afrooz Johnson, ‘The devil's in the detail: directors' and officers' insurance and defence costs’ (2005) 57 Keeping Good Companies 292.
[44] Corporations Act 2001 (Cth) s 199A.
[45] Corporations Act 2001 (Cth) s 199B.
[46] Whilst prospective relief is possible on the wording of the statute, the New South Wales Court of Appeal has ruled that it should not be granted, which is discussed in the next part.
[47] Corporations Act 2001 (Cth) s 1317S.
[48] Corporations Act 2001 (Cth) s 1318(1).
[49] Deputy Commissioner of Taxation v Dick [2007] NSWCA 190; (2007) 64 ACSR 61, [78] (Santow JA). As Tadgell J said in Commonwealth Bank of Australia v Friedrich (1991) 9 ACLC 946, 1012: ‘in considering whether relief under [predecessor of s 1318] should be granted, I am to assume, ex hypothesi, that [the director] has been guilty of a default or breach of duty.’
[50] Edwards v Attorney-General (NSW) [2004] NSWCA 272; (2004) 60 NSWLR 667.
[51] Australian Securities and Investments Commission v Vines [2005] NSWSC 1349; (2005) 224 ALR 499; (affirmed on appeal: Vines v Australian Securities and Investments Commission (2007) 62 ACSR 1; Hall v Poolman [2007] NSWSC 1330; (2007) 65 ACSR 123, [314] (Palmer J) (approving statements in Scott v Williams [2002] SASC 424 (Unreported, Lander J, 20 December 2002) [103].
[52] Edwards v Attorney-General (NSW) [2004] NSWCA 272; (2004) 60 NSWLR 667.
[53] Lawson v Mitchell [1975] VicRp 57; [1975] VR 579; Deputy Commissioner of Taxation v Dick [2007] NSWCA 190; (2007) 64 ACSR 61, [36] (Spigelman CJ).
[54] Dominion Insurance Co of Australia Ltd (in liq) v Finn (1988) 7 ACLC 25, 33 (Powell J).
[55] Corporations Act 2001 (Cth) ss 1317S(2), 1318(1).
[56] Report of the Company Law Amendment Committee of 1906 (the Reid Committee). This was adopted into Australian corporate law in Companies Act 1910 (Vic) s 288; Companies Act 1936 (NSW) s 361: see further Lawson v Mitchell [1975] VicRp 57; [1975] VR 579; Edwards v Attorney-General (NSW) [2004] NSWCA 272; (2004) 60 NSWLR 667, 690 (Young CJ in Eq); Deputy Commissioner of Taxation v Dick [2007] NSWCA 190; (2007) 64 ACSR 61; Companies and Securities Law Review Committee, Discussion Paper No 9: Company Directors and Officers: indemnification, relief and insurance (April 1989), <www.takeovers.gov.au> at 17 October 2008.
[57] Lord Loreburn who was involved in the committee of 1906 had previously chaired the committee which recommended a similar relief provision be included in trustee legislation: see Rod Edmunds and John Lowry, ‘Relieving Directors’ Breach of Duty’, in Sarah Worthington, Commercial Law and Commercial Practice (2003), Ch 19.
[58] The provisions originally required reasonableness, but this was removed by amendments in 1981. The relevance of reasonableness is discussed further below. See further Deputy Commissioner of Taxation v Dick [2007] NSWCA 190; (2007) 64 ACSR 61.
[59] See the discussion in Deputy Commissioner of Taxation v Dick [2007] NSWCA 190; (2007) 64 ACSR 61 (‘Dick’), [27]-[30] (Spigelman CJ).
[60] Ibid [43]-[45] (Spigelman CJ).
[61] Daniels v Anderson (1995) 37 NSWLR 438, 525 (Clarke and Sheller JJA).
[62] Commonwealth Bank of Australia v Friedrich (1991) 9 ACLC 946, 1012 (Tadgell J). These comments were made in the context of a voluntary non-executive director of a not for profit organization, even though relief was not granted in that case.
[63] Australian Securities and Investments Commission v Vines [2005] NSWSC 1349; (2006) 24 ACLC 165; (affirmed on appeal: Vines v ASIC (2007) 62 ACSR 1).
[64] Corporations Act 2001 (Cth) s 1317S(1). Civil penalty provisions are identified in s 1317E.
[65] Corporations Act 2001 (Cth) s 1318(2); see also Deputy Commissioner of Taxation v Dick [2007] NSWCA 190; (2007) 64 ACSR 61, [91]-[94] (Santow JA).
[66] Edwards v Attorney-General (NSW) [2004] NSWCA 272; (2004) 60 NSWLR 667.
[67] Maelor Jones Investments (Noarlunga) Pty Ltd v Heywood-Smith (1989) 7 ACLC 1,232, 1,251 (Olsson J); Re Voets Investments Pty Ltd (1962) 79 WN (NSW) 670, 677 (Jacobs J); Dominion Insurance Co of Australia Ltd (in liq) v Finn (1988) 7 ACLC 25, 33 (Powell J).
[68] Powell v Fryer [2001] SASC 59; (2001) 37 ACSR 589, [111] (Olsson J).
[69] Re Voets Investments Pty Ltd (1962) 79 WN (NSW) 670, 677 (Jacobs J); Dominion Insurance Co of Australia Ltd (in liq) v Finn (1988) 7 ACLC 25, 34 (Powell J).
[70] Dominion Insurance Co of Australia Ltd (in liq) v Finn (1988) 7 ACLC 25, 33 (Powell J).
[71] Commonwealth Bank of Australia v Friedrich (1991) 9 ACLC 946, 1011 (Tadgell J); ASIC v Vines [2005] NSWSC 1349; (2005) 65 NSWLR 281, 293 (Austin J); ASIC v Edwards (No 3) [2006] NSWSC 376; (2006) 57 ACSR 209.
[72] Dominion Insurance Company of Australia Limited (in liq) v Finn (1989) 7 ACLC 25, 33-34 (Powell J).
[73] Australian Securities and Investments Commission v Edwards (No 3) [2006] NSWSC 376; (2006) 57 ACSR 209.
[74] Australian Securities and Investments Commission (No 5) [2001] FCA 1402; (2002) 20 ACLC 1,146.
[75] Hall v Poolman [2007] NSWSC 1330; (2007) 65 ACSR 123, [321].
[76] Ibid [325].
[77] Advance Bank Australia Ltd v FAI Insurances Ltd (1987) 9 NSWLR 464, 491 (Kirby P); Circle Petroleum (Qld) Pty Ltd v Greenslade (1998) 16 ACLC 1577, 1598 (Carr J).
[78] Vines v Australian Securities and Investments Commission (2007) 62 ACSR 1, [557] (Spigelman CJ).
[79] Maelor Jones Investments (Noarlunga) Pty Ltd v Heywood-Smith (1989) 7 ACLC 1,232.
[80] Daniels v Anderson (1995) 37 NSWLR 438, 525 (Clarke and Sheller JJA).
[81] Duke Group Ltd (in liq) v Pilmer [1998] SASC 6529; (1998) 16 ACLC 567, 686 (Mullighan J); Investa Properties Ltd v Westpac Property Funds Management Ltd [2001] NSWSC 1089; (2001) 40 ACSR 124 (applying similar provisions under trustee legislation).
[82] Powell v Fryer [2001] SASC 59; (2001) 37 ACSR 589, [112]-[113] (Olsson J).
[83] Australian Securities and Investments Commission v Vines [2005] NSWSC 1349; (2006) 24 ACLC 165; (affirmed on appeal: Vines v ASIC (2007) 62 ACSR 1).
[84] Gamble v Hoffman (1997) 15 ACLC 1314, 1330 (Carr J); Pace v Antlers Pty Ltd (in liq) (1998) 16 ACLC 261, 284 (Lindgren J); Green v Wilden Pty Ltd [2005] WASC 83, (Unreported, Hasluck J, 10 May 2005) [542].
[85] Circle Petroleum (Qld) Pty Ltd v Greenslade (1998) 16 ACLC 1577.
[86] Commonwealth Bank of Australia v Friedrich (1991) 9 ACLC 946, 1011 (Tadgell J); Circle Petroleum (Qld) Pty Ltd v Greenslade (1998) 16 ACLC 1577, 1598 (Carr J); Kenna & Brown Pty Ltd v Kenna (1999) 17 ACLC 1183, 1204 (Bergin J).
[87] Maelor Jones Investments (Noarlunga) Pty Ltd v Heywood-Smith (1989) 7 ACLC 1,232; ASIC v Vines [2005] NSWSC 1349; (2006) 24 ACLC 165 (affirmed on appeal: Vines v ASIC (2007) 62 ACSR 1).
[88] Commonwealth Bank of Australia v Friedrich (1991) 9 ACLC 946, 1011 (Tadgell J); Kenna & Brown Pty Ltd v Kenna (1999) 17 ACLC 1183.
[89] Australian Securities and Investments Commission v Manito Pty Ltd [2005] FCA 386; (2005) 23 ACLC 827.
[90] Pace v Antlers Pty Ltd (in liq) (1998) 16 ACLC 261, 284 (Lindgren J); Downey v Crawford (2005) 23 ACLC 104; [2004] FCA 1264, [195] (Weinberg J); cf ASIC v Vines [2005] NSWSC 1349; (2006) 24 ACLC 165 (affirmed on appeal: Vines v ASIC (2007) 62 ACSR 1).
[91] Hall v Poolman [2007] NSWSC 1330; (2007) 65 ACSR 123, [341], [342] (Palmer J).
[92] Commonwealth Bank of Australia v Friedrich (1991) 9 ACLC 946, 1012 (Tadgell J).
[93] Hall v Poolman [2007] NSWSC 1330; (2007) 65 ACSR 123, [379] (Palmer J).
[94] Although no empirical studies have been undertaken, a number of commentators have noted this tendency: see Bob Baxt, ‘Forgiving Directors for Insolvent Trading – Some Promising Signs (February, 2008) Company Director 48; John Farrar, ‘Towards a Statutory Business Judgment Rule in Australia’ (1998) 8 Australian Journal of Corporate Law 237.
[95] [2007] NSWCA 190; (2007) 64 ACSR 61.
[96] Income Tax Assessment Act 1936 (Cth) s 222AOJ(2). Note that a similar defence applies to director’s liability for insolvent trading under the Corporations Act 2001 (Cth) s 588H(4). For a discussion of the meaning of ‘some other good reason’ see Deputy Commissioner of Taxation v Clark [2003] NSWCA 91; (2003) 57 NSWLR 113.
[97] This result is unsurprising given previous decisions on the issue of so-called sleeping directors: Morley v Statewide Tobacco Services Ltd [1993] VicRp 32; [1993] 1 VR 423; Deputy Commissioner of Taxation v Clark [2003] NSWCA 91; (2003) 57 NSWLR 113. See further Sally Sievers, ‘Farewell to the Sleeping Director’ (1993) 21 Australian Business Law Review 111.
[98] Deputy Commissioner of Taxation v Dick [2007] NSWCA 190; (2007) 64 ACSR 61, [11]-[21] (Spigelman CJ).
[99] Ibid [142], [152] (Basten JA).
[100] Ibid [110] (Santow JA).
[101] Ibid [105] (Santow JA).
[102] His Honour applied statements from Anthony Hordern & Sons Ltd v Amalgamated Clothing and Allied Trades Union of Australia (1932) 47 CLR 1, 7 (Gavan Duffy CJ and Dixon J): Deputy Commissioner of Taxation v Dick [2007] NSWCA 190; (2007) 64 ACSR 61, [120]-[123] (Santow JA).
[103] Deputy Commissioner of Taxation v Dick [2007] NSWCA 190; (2007) 64 ACSR 61, [125] (Santow JA).
[104] [2007] NSWSC 1330; (2007) 65 ACSR 123.
[105] See further Deputy Commissioner of Taxation v Broadbeach Properties Pty Ltd [2008] HCA 41; (2008) 67 ACSR 593.
[106] Hall v Poolman [2007] NSWSC 1330; (2007) 65 ACSR 123, [17].
[107] See Corporations Act 2001 (Cth) s 536.
[108] These are the elements of civil liability under Corporations Act 2001 (Cth) s 588G.
[109] Corporations Act 2001 (Cth) s 588H.
[110] Hall v Poolman [2007] NSWSC 1330; (2007) 65 ACSR 123, [311]-[314].
[111] Ibid [329].
[112] See Chartered Bank of Australia Ltd v Antico (Nos 1 and 2) [1995] NSWSC 31; (1995) 38 NSWLR 290; Southern Cross Interiors Pty Ltd (in liq) v Deputy Commissioner of Taxation [2001] NSWSC 621; (2001) 53 NSWLR 213; Lewis v Doran [2004] NSWSC 608; (2004) 50 ACSR 175.
[113] Hall v Poolman [2007] NSWSC 1330; (2007) 65 ACSR 123, [331].
[114] Ibid [332].
[115] Mr Irving was however successful in his application for equitable contribution from the other directors for liability incurred after the meeting on 5 February 2003. One of the non-executive directors was only liable to contribute for liabilities incurred after the end of February as she had made enquiries with Mr Irving as to the outcome of the meeting with the Tax Office and only received a response at the end of February.
[116] Hall v Poolman [2007] NSWSC 1330; (2007) 65 ACSR 123, [338].
[117] Ibid [325].
[118] See <http://www.asic.gov.au/asic/ASIC.NSF/byHeadline/Speeches%20portal> .
[119] Although not if the company is in liquidation: Chahwan v Euphoric Pty Ltd (t/as Clay & Michel) [2008] NSWCA 52; (2008) 65 ACSR 661; cf Ragless v IPA Holdings Pty Ltd (in liq) [2008] SASC 90; (2008) 65 ACSR 700.
[120] It is to be noted the effect of the decision in The Bell Group Ltd (in liq) v Westpac Banking Corporation (No 9) [2008] WASC 239 (Unreported, Owen J, 28 October 2008) may mean that directors will also be cautious in ensuring that they do not breach their duties to creditors as the company reaches the tipping point of insolvency.
[121] Bob Baxt, ‘Forgiving Directors for Insolvent Trading – Some Promising Signs (February, 2008) Company Director 48; John Farrar, ‘Towards a Statutory Business Judgment Rule in Australia’ (1998) 8 Australian Journal of Corporate Law 237.
[122] Australian Government, Companies and Securities Law Review Committee, Company directors and officers: indemnification, relief and insurance, Report No 10 (May 1990) [118], <www.takeovers.gov.au> at 17 October 2008.
[123] For a historical review of these developments see John Farrar, ‘Towards a Statutory Business Judgment Rule in Australia’ (1998) 8 Australian Journal of Corporate Law 237; Frank Carrigan, ‘The role of capital in regulating the duty of care and business judgment rule’ (2002) 14 Australian Journal of Corporate Law 215.
[124] See for example Corporations Act 2001 (Cth) ss 180(2), 588H, 674(2B), 731. See further Neil Young, ‘Has directors' liability gone too far or not far enough? A review of the standard of conduct required of directors under sections 180-184 of the Corporations Act’ (2008) 26 Company and Securities Law Journal 216.
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