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Discussion on Ben’s Liability As a Director: Company Law Assessment Answer

Question 1. (25 marks) 

AGC Software Pty Ltd (AGC) is a small proprietary company limited by shares that develops, tests and markets its own “anti-malware” software products. Ben has been the sole director at AGC for two years, and prior to that appointment he had served in many other executive roles for a variety of software companies. Ben also holds 40% of the shares in AGC. The remaining shares (60%) are held by 5 other shareholders who are not directors in AGC.

Ben and the employees of AGC consider themselves to be highly skilled and knowledgeable in their field. AGC has been increasing its share in the anti-virus software market over the last year which has attracted the attention of the market-leading company, Big Nanny Ltd (Nanny). Nanny makes an offer to Ben that the company will purchase as many shares in AGC as Ben can sell to them, paying him $18.95 per share. This offer is very generous as a recent independent valuation valued AGC shares at only $12.95 each.

Ben swiftly makes an offer to buy the shares of the other 5 shareholders in AGC. These shareholders accept Ben’s offer of $13.50 per share to sell most of their shares. However, after the sale is completed, the shareholders are shocked to find out that Ben subsequently sold his newly acquired shares to Nanny for $18.95 each. The shareholders are further shocked when they learn by chance that Ben’s wife is the Managing Director of Nanny.

Question 1: Answer both A and B
A). Discuss Ben’s liability as a director in terms of the Corporations Act 2001 (Cth) and the relevant case law (15 marks).
B). Discuss the possible remedies that AGC and the shareholders of AGC could seek against Ben (10 marks).

Question 2.  (25 marks)
Very Big Mines Ltd (VB Mines) was a no-liability company that operated in the Pilbara region of Western Australia. It was registered in January 2013 and began operating in the same year. At first, the company was very successful and secured lucrative contracts for mining iron ore. However, following the end of the “mining boom” in 2015, the company became insolvent in February 2016.

At the time of becoming insolvent, VB Mines owed money to several creditors, with the debts running into tens of millions of dollars. However, VB Mines owned several very large rural properties over which it held valid mining licences. VB Mines held valid leases (expiring in 2018) over most of their mining plant and equipment, including a lease for a high-tech device that can detect commercially viable resource deposits.

At the time company became insolvent, it was widely observed by experts that the downturn in global iron ore demand was likely to be long-term. The board of VB Mines decided in February 2016 to place the company into voluntary administration.

Question 2: Answer A, B, C and D
A). Define ‘insolvency’ under the Corporations Act 2001 (Cth) (2 marks).
B). Explain why directors may want to place their company into voluntary administration (3 marks).
C). Outline the procedure once a company enters voluntary administration (5 marks).
D). Given the circumstances of VB Mines, consider each course of action that the administrator could have taken, paying attention to interactions between the company’s directors and members and creditors and the administrator. Which course of action do you think would be most suitable given VB Mine’s situation? (15 marks)

Answer

Question 1. (25 marks) 

AGC Software Pty Ltd (AGC) is a small proprietary company limited by shares that develops, tests and markets its own “anti-malware” software products. Ben has been the sole director at AGC for two years, and prior to that appointment he had served in many other executive roles for a variety of software companies. Ben also holds 40% of the shares in AGC. The remaining shares (60%) are held by 5 other shareholders who are not directors in AGC.

Ben and the employees of AGC consider themselves to be highly skilled and knowledgeable in their field. AGC has been increasing its share in the anti-virus software market over the last year which has attracted the attention of the market-leading company, Big Nanny Ltd (Nanny). Nanny makes an offer to Ben that the company will purchase as many shares in AGC as Ben can sell to them, paying him $18.95 per share. This offer is very generous as a recent independent valuation valued AGC shares at only $12.95 each.

Ben swiftly makes an offer to buy the shares of the other 5 shareholders in AGC. These shareholders accept Ben’s offer of $13.50 per share to sell most of their shares. However, after the sale is completed, the shareholders are shocked to find out that Ben subsequently sold his newly acquired shares to Nanny for $18.95 each. The shareholders are further shocked when they learn by chance that Ben’s wife is the Managing Director of Nanny.

Question 1: Answer both A and B
A). Discuss Ben’s liability as a director in terms of the Corporations Act 2001 (Cth) and the relevant case law (15 marks).

The directors are under the obligation to maintain the confidentiality of the information relating to internal matters of the Company. The insider trading occurs when:-

  1. The director or other person is having knowledge of the insider information which is not disclosed to the general public or third parties.
  2. The information is insider matters like price and values of the shares.
  3. The director or other person has given any material information which can give the advantage to other person.

The Insider trading is considered as an offence under the provisions of the Corporation Act, 2001. (Coroprates Act, 2001). The culpability of the offence creates the fear in the mind of other interested persons to share any confidential information relating to the internal affairs of the Company. Section 182 of the act authorizes the directors to forbid them to take any undue advantage by misusing the position in the Company. If any person breaches the provisions of this section, he shall be liable for civil obligation as per the provisions of section 1317E. (sec 180-183, n.d.)

As per the given case study, AGC software Pty. Ltd. is engaged in development, testing and marketing of anti malware softwares and one director is Ben who is also holding 40% stakes in the shares of the Company. The remaining shares are subscribed by the other five shareholders. There is a leading company that is Big Nanny Ltd. (Nanny) in which managing director Nanny is the wife of Ben. There is proximate relation between Ben and Nanny. The transactions of sale of shares shall be deemed as Related Party Transactions. As per the statutes, the related party transactions are approved by the members of the Company. (related party transaction, n.d.). Ben gave a proposal to other 5 shareholders to buy their shares at the rate of $13.50 per share even the price of share is valued at $12.95 per share. The shareholders accepted his proposal irrespective of the knowledge of the related party transactions. Ben further transferred the shares to her wife Nanny at the rate of $18.95 per share without any approval of the members. Ben is guilty of the offence of insider trading and will get the punishment under Section 1043A of the Corporations Act, 2001. The Civil liability as well as criminal liability can be imposed under him. In the Case of Mansfield v The Queen (2012) HCA 49the director is engaged in the practice of insider trading and hence, the members get the necessary actions against that director thought the information supplied was false as per the records of the company. He will be held liable for the offence. (Insider trading, 2020)

Therefore, Ben has committed the offence under the purview of Corporations Act, 2001. He can be compelled for civil liability in which the injured parties i.e. members can get the compensation from the directors involved in the insider trading  (Insider trading, 2020)
B). Discuss the possible remedies that AGC and the shareholders of AGC could seek against Ben (10 marks).

The remedies against the offences of insider trading are given to the shareholders. If the company is listed entity, they have the trading policy according to the rules prescribed under Rule 12.12. The trading policy must be formulated in accordance to the details as prescribed under the rules. (Insider trading, 2020)

The provisions of insider trading attracts the various penal provisions and these provisions mention the imprisonment up to 10 years and fine of $495000 or three times of the profit gained or 10% of annual turnover of the body corporate whichever is higher. The victim has been given a remedy to file the civil suit to enforce the civil rights. ASIC is also empowered to bring the legal action for the benefit of issuer. The members can move the matter before the court and the court can decide their rights and award compensation under the provisions of Section 1043L of Corporations Act, 2001  (Insider trading, 2020)

Therefore, the act of insider trading has culpability under the provisions of the Corporations Act, 2001. The accused shall be held liable for civil as well as criminal actions. These provisions expiate the other interested parties not to misuse their position in the Company.  (Insider trading, 2020)

Question 2.  (25 marks)
Very Big Mines Ltd (VB Mines) was a no-liability company that operated in the Pilbara region of Western Australia. It was registered in January 2013 and began operating in the same year. At first, the company was very successful and secured lucrative contracts for mining iron ore. However, following the end of the “mining boom” in 2015, the company became insolvent in February 2016.

At the time of becoming insolvent, VB Mines owed money to several creditors, with the debts running into tens of millions of dollars. However, VB Mines owned several very large rural properties over which it held valid mining licences. VB Mines held valid leases (expiring in 2018) over most of their mining plant and equipment, including a lease for a high-tech device that can detect commercially viable resource deposits.

At the time company became insolvent, it was widely observed by experts that the downturn in global iron ore demand was likely to be long-term. The board of VB Mines decided in February 2016 to place the company into voluntary administration.

Question 2: Answer A, B, C and D
A). Define ‘insolvency’ under the Corporations Act 2001 (Cth) (2 marks).

Insolvency is defined under section 95A of Corporations Act, 2001 which is as follows:-

‘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. (2) A person who is not solvent is insolvent. (3) Section 922 defines when a person becomes insolvent for the purposes of Part 7.10.’ (Insolvency, coprorations act, , 2020)

Insolvency means a situation where the company is unable to pay its debts out of the assets of the company. Thus, it is a position of distress. In such situation, the company has to sell its assets to pay out the debts  (Insider trading, 2020)

B). Explain why directors may want to place their company into voluntary administration (3 marks).

Voluntary Administration is a strategic tool prescribed under Part 5.3A of Corporations Act, 2001 which is used to restructure the business. This method is used to protect the interests of the members or creditors to set again the business activities  (Insider trading, 2020)

As per Section 436A of Corporations Act, 2001, when the company is in the process of insolvency or going to choose the option of insolvency, the director or creditors can give the management in the hands of administrators (Directdo law and rules, 2020).

Thus, the company is growing undertaking but due to downfall in the demand of iron ore, the business of company is vanished. The directors of the company have decided to handover the administration in the hands of liquidator to secure the interests of the creditors (law and rules of the corprotaion act, 2020)

C). Outline the procedure once a company enters voluntary administration (5 marks).

In the situation of insolvency or prospective insolvency, there is a prudent technique prescribed under section 435A of Corporations Act, 200. This section has two fold objects:  (Insider trading, 2020)

  1. To enhance the chances of restarting the business of the company
  2. If there is no chances of restarting the business, the creditors or the management may appoint the liquidator to protect their interest and he undertakes the sale of immoveable properties of the company and distribute the sale proceeds in the members or creditors (Insolvency, coprorations act, , 2020)

Primarily, the position of the company is determined from its cash flows. (Sutherland v Hanson Construction Materials Pty Ltd, 2020). It is also clear that the balance sheet is not solely help to determine the position of insolvency but the question of insolvency vary from case to case.

There are various steps for the proper implementation of the process of voluntary administration which are following: (law and rules of the corprotaion act, 2020).

(law and rules of the corprotaion act, 2020).

When an administrator is appointed, the powers of directors are transferred to administrators and he will liable to perform the duties diligently. The directors are duty bound to assist the administrator to understand the scenario of the business of the company and report on the same before the creditors. (Insolvency Practice Schedule and the Insolvency Practice Rules , 2020). There is a deed of company Arrangement entered into between the Company and the administration by which all the creditors of the company are under obligation to follow the direction of the administrator. After convening the proper general meeting of the creditor, the creditors may pass the resolution for voluntary winding up of the company pursuant to the section 446A (1) and 446A (2) of the Corporations Act, 2001. The resolutions for winding up are finally passed under section 491 of the act (Corporation rules and regulation, 2020).

As a result of voluntary administrator, the company may be revived by the comprehensive efforts of Administrators or creditors or members of the company or it may go for voluntary winding up if there is no chance remaining except the closing of the company (law and rules of the corprotaion act, 2020).

D). Given the circumstances of VB Mines, consider each course of action that the administrator could have taken, paying attention to interactions between the company’s directors and members and creditors and the administrator. Which course of action do you think would be most suitable given VB Mine’s situation? (15 marks)

When the company is under the process of voluntary administration, the directors cannot perform their duties as given under constitution or under the purview of Corporations Act, 2001. In certain circumstances, the administrator can give the written permission to exercise the functions (Directdo law and rules, 2020).

Pursuant to the provisions as laid down under Section 437C of the Act, the directors are bound to give the control on the book of accounts or other documents of the company and also provide the relevant information relating to the affairs of the company  (Insider trading, 2020)

The members can transfer their after getting the approval from the administrator under the provisions of Section 437F of the Act or the administrator may impose any other condition as he thinks fit. The members may transfer their shares on the basis of the order of the court (Law and rules, 2020).

As per the provisions of Section 436A of the Act, the administrator may be appointed by three authorities:- 

1. Directors 

2. Liquidator of the Company 

3. A person having charge over the property of the company

The creditors rely on the report of the administrator after reviewing the other documents and information placed along with report. On the basis of his report, the creditors can take the best decision in respect to insolvency of the company. The functions of administrator are very significant otherwise the whole process of voluntary administration may be vitiated (Directdo law and rules, 2020).

In this case study, VB was a profit gaining undertaking but after negative demand of iron ore, the business is fall down which leads to the company in the process of insolvency. To deal with such situation, the directors of the company decided to opt the tool of voluntary administration which may be helpful either in survival of the business affairs of the company or secure the interest of the creditors by voluntary winding up (Directdo law and rules, 2020).

Therefore, the directors voluntarily adopted the process of voluntary administrator in view of protection of interests of all the creditors or in welfare of the company  (Insider trading, 2020)

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