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BLAW5016 Fundamentals Of Business And Corporations Law

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BLAW5016 Fundamentals Of Business And Corporations Law

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BLAW5016 Fundamentals Of Business And Corporations Law

1 Download8 Pages / 1,861 Words

Course Code: BLAW5016
University: Curtin University

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Country: Australia

Question:
Case
Exotic Ltd, a listed Australian public company provides exclusive luxurious and exotic holidays and operates a water front resort on a remote Pacific island. Joel is the managing director of Exotic Ltd. The other two directors are Bill a non-executive director appointed due to his connections with banks and financial institutions and Bibi, a Pacific islander with local connections. Bill lives in Perth and finds it difficult to attend monthly directors’ meetings on the island. He has missed the last two meetings and also cannot attend the next one, as he has a birthday party in Perth.
At the next meeting, the directors are to consider the company’s financial position and a loan. Over the last few years the water in front of the resort has been showing increased algae presence due to climate change and the directors have been aware of this. However this year the algae bloom is so bad that the guests have been unable to swim or go into the water. As a result, the cost of the on-going treatment plan has increased drastically.  The company providing the treatment, Pacific Algae Treatment Inc, has stopped work as payments from Exotic Ltd are overdue. The directors of Pacific Algae Treatment Inc have informed the directors that Exotic Ltd has no choice but to incur major costs of treating the algae bloom and then contain the treated water by building a surrounding wall. The directors may need to consider obtaining a loan from Shark Finance Pty Ltd to pay for the major cost of treating and containing the algae bloom.
Bill believes that it will not matter if he does not attend the meeting because, after missing so many, he is not up to date with the company’s financial position. Also, he thinks it is better if the other directors are not aware of his father’s connection with Shark Finance Pty Ltd so they would not be biased to support it. 
At the board meeting, the directors decide to follow advice from Pacific Algae Treatment Inc and change the algae treatment plan and build a surrounding wall so that the resort will continue to attract wealthy high spending tourists. Financial plans provided by the company accountant to the directors indicate that this should enable the company to trade out of its financial difficulties. A decision is made to obtain a large loan from Shark Finance Pty Ltd to pay the past amounts owing to Pacific Algae Treatment Inc to cover the more expensive algae treatment and to build a surrounding retaining wall.
A few months after the renovations are completed the only major airline servicing the Pacific island ceases operations due poor demand arising from the publicity of the algae bloom on that island.  Only a small airline offering budget tourist packages is prepared to operate on the island, but such guests will not pay the higher charges of the resort. Shortly thereafter, Exotic Ltd fails to pay interest due on the Shark Finance Pty Ltd loan and a liquidator is appointed to the company.
Questions:
Discuss the following matters [referring to the Corporations Act 2001 (Cth) and cases and the uploaded research material in part (a)].
(a) Research and upload five Australian articles relating to directors’ duties and climate risk that will assist you in answering part (b) below. Your articles can be from cases, case notes, journal articles, opinions and publications from legal firms, Government bodies such as the ASIC, APRA, and other specific climate change related bodies etc.
(b) Discuss if the directors of Exotic Ltd (listed company) could be held liable for breach of duty of care and diligence in failing to take steps, including failure in reporting financial risks to the shareholders, in relation to the foreseeable climate-related risks that may have caused harm to the company, including reputational harm.
(c) Whether the conduct of Bill or the other directors could make them liable for any of the debts of Exotic Ltd as a result of the company’s insolvency and defences they may have against the liability.
 
Answer:

Area of Law Concerned
Whether the directors of Exotic Ltd can be rendered liable for their contravention of duty of care and diligence with respect to their failure to undertake proper measures along with failure in reporting financial risks towards shareholders with respect to foreseeable climatic change risks probable to cause injury towards the company which might include reputational harm as well.
Relevant Legal Principles
As per the provisions contained in s 180 (1), CA, any individual who has been holding the designation of a director or an officer in a company having the authority to take part in the management of the company would have the liability to ensure all their actions and powers to be exercised in a careful and diligent manner. The care and diligence that is required to be inflicted within the actions of the directors are to be assessed as per the actions of a reasonable man acting in the similar situation under the similar designation. Any director who has been acting in contravention of the provisions of the section would be held liable to incur a civil penalty under s 1317E, CA.
It has been held in the case of ASIC v Cassimatis (No 8) [2016] FCA 1023, any director who has not been diligent or careful while discharging their duties as a director in conducting the affairs of the company, would be held liable to incur civil liability.
The duty of a director to ensure their actions to be careful and diligent while conducting the affairs of the company would also cover the assessment and their response towards the risks that may be presented or has the probability of being presented by the alterations in the climatic conditions. The actions of the director while conducting the affairs of the business needs to be undertaken after assessing the climatic risks that might impact the business of the company which has significance with respect to the interest of the company. Such an assessment and discovery of climatic risks having the probability of impacting the business of the company needs to be addressed by the directors by adopting 4 positive measures. These measures include to avail further information, disclosure of the risks inculcated within the financial reporting framework, adopting measures befitting the situation along with undertaking of steps to mitigate the situation. Any director who has been found to have avoided or failed to consider and address the probable climatic changes that might be having the probability of causing injury to the company or has been negligent in bringing the same to the notice of the shareholder by including such an assessment of climatic risks in the financial reporting framework, would be held liable under the provisions of s 180 (1), CA. This is because assessment of the climatic change risks along with the disclosure of the same and the adoption of proper measures to combat the same is to be construed as an action that a diligent and careful director under the reasonable conditions would take.
The companies operating in Australia is required to prepare financial reports along with directors reports annually as per the provisions contained in s 292, CA. The companies which are listed are required to prepare as well as launch the financial report along with directors report every year. Such a company is also required to include any environmental risk that is probable in the given situation within the financial report.
It has been held in the case of Rafferty v Madgwicks [2012] FCAFC 37, the failure to disclose any information which is material as per the circumstances would amount to a deceptive or misleading conduct.
However, for the purpose of holding a director liable for the failure of incorporating the climatic change risks, the foreseeability of the climatic change risk is required to be established has been established in the case of ASIC v Vines [2003] NSWSC 1095.
 
Application
In the present situation, Exotic Ltd. has been a company involved in waterfront resort operations honour remote Pacific Island. presided by a Managing Director namely Joel and two non executive directors namely Bill and Bibi. Owing to algae bloom that has occurred as a result of a climatic change, there has been a financial distress presented to the company as the situation requires a treatment of the algae. This has made the company upon the advice of the Pacific Algae Treatment Inc, which has been treating the algal bloom to avail a loan for upgrading the treatment of the algae. The directors have agreed and proceeded with the loan without considering the risks of the algae bloom in the island. However due to the publicity of the algal bloom, the major airlines has ceased its servicing operation owing to reduction in demand. The tourists who have been visiting the island were not willing to pay high price for the resort services. This has rendered to company insolvent. This can be treated as a failure of the directors to assess and address the climatic related risks that might be presented by the algae bloom. This has also been a failure on the part of the directors of the company to meet the disclosure requirements with respect to the climate related risks. Moreover, the reduction in the tourist owing to the publicity of the algal bloom in the island has been a foreseeable risk. Hence, ignoring the same would be an action which would be considered as a contravention of the duty of care and diligence on the part of the directors. Hence, the directors of Exotic Ltd can be rendered liable for their contravention of duty of care and diligence with respect to their failure to undertake proper measures along with failure in reporting financial risks towards shareholders with respect to foreseeable climatic change risks probable to cause injury towards the company which might include reputational harm as well.
 
Conclusion
The directors of Exotic Ltd can be rendered liable for their contravention of duty of care and diligence with respect to their failure to undertake proper measures along with failure in reporting financial risks towards shareholders with respect to foreseeable climatic change risks probable to cause injury towards the company which might include reputational harm as well.
c) Area of Law Concerned
Whether Bill and the other directors of the company can be held liable for the incurrence of the debts by the company, which has led the company towards insolvency. Whether any defence can be resorted by the directors to evade liability from the claim of insolvent trading.
 
Relevant Legal Principles
As per the provisions contained in s 588G (1), CA, the directors designated in a company are required to undertake required measures to prevent the company from indulging into transactions for trading activities that has the probability of leading the company towards insolvency. The provision contained in this section would be invoked if an individual has been designated as a director in a company during the incurrence of the debt that has led the company towards insolvency and during the incurrence of the debt there has been enough grounds reasonably available to the directors to form a suspicion of the probable insolvency of the company if the debt has been incurred.
As per the provisions contained in s 588G (2), CA, if a director has been aware of the presence of reasonable ground for suspecting probable insolvency of the company or has the probability of suspecting the same being a person of reasonable conscience and has failed to prevent the company from incurring any debt that would render it to be insolvent, then the director involved would be liable under civil penalty as for s 1317E, CA.
As per the provisions contained in s 588G (3), CA, when a director involved in insolvent trading has dishonest intentions behind the same, he would be rendered liable for an offence.
As per the provisions contained in s 588H, CA, any person designated as a director of a company who has invoke the provisions under s 588G, CA can take resort under this section as a defence if he can prove that the decision of inquiring the debt has been reasonable on the given circumstances he has been presented with. He can also seek resort under the provisions of this section defence if he can prove that his decision has been based upon the information provided to him by an individual who can be said to have the competence and is reliable in relation to the information provided. Moreover, if a director is not being able to participate in the management of the affairs of the company owing to his health related issues or any other reasonable issues, any liability under insolvent trading will not extend to him during that time.
It has been held in the case of The Bell Group Ltd (in liq) v Westpac Banking Corporation & Ors [No 9] [2009] WASC 239, any director who has been liable to have incurred a debt leading the company towards insolvency would be held liable u/s 588G, CA.
 
Application
In the present situation, Exotic Ltd. has been a company involved in waterfront resort operations honour remote Pacific Island. presided by a Managing Director namely Joel and two non executive directors namely Bill and Bibi. Owing to algae bloom that has occurred as a result of a climatic change, there has been a financial distress presented to the company as the situation requires a treatment of the algae. The financial distress has been pointing towards the fact that further expense incurred for availing a better treatment of alga has the probability of rendering the company to be insolvent. The incurring of the debt from the bank that has caused the insolvency of the company can be said to have accrued towards the directors under 588G, CA.
However it has been provided by the accountant of the company that the incurrence of the expense by availing a loan from the bank would help the company to combat the situation and make profit by accommodating more tourists willing to pay high price. This may bring the situation under the purview of s 588H, CA as they have been relying upon the information provided by the accountant of the company. Moreover Bill has the probability of claiming defence under the fact that he has not been able to attend the management of the company for the distance of the company from his residence. But this will not be allowed as he has a conflict of interest in the situation being aware of the fact that his father has been working for the bank from which the company has been availing the loan and has wilfully refrained from attending the meeting for concealing this fact. Moreover, the other directors were also under an obligation to take an opinion from an external accountant or financial advisor before availing the loan. Hence the defence will not be available to them.
 
Conclusion
Bill and the other directors of the company can be held liable for the incurrence of the debts by the company, which has led the company towards insolvency. No defence can be resorted by the directors to evade liability from the claim of insolvent trading.

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