AUS Corp Law HP Case Case Study

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The June 2010 change to the manner in which dividends were deemed payable shifted the requirement from a measure of profit to a balance sheet-based formula in which dividends were only payable if assets outstripped liabilities, essentially.

This is, according to the facts of the case as presented, the only reason the dividend payment might be considered insolvent trading or otherwise contrary to the legal and financial constraints of the company under current Australian law. As the error was again solely the fault of chief financial officer George, the directors incur no liability in this instance.

Part B

As described above, the board of directors at Hampton Park Pty, Ltd. incurred no liability in this case as they relied on information provided by a competent and informed employee in the person of the company's chief financial officer, George, which legally absolves them of liability in this case.

Whether or not the company ultimately engaged in insolvent trading would require a more careful analysis of financial documents and a deeper knowledge of the facts of the case than are given, but that the directors would not be liable for any insolvent trading is certain and that such trading did not exist at all -- i.e. this does not appear to be a case when dividends were declared at a time when the company could not meet its obligations, but rather it was unable to meet its obligations shortly after paying a dividend (though not as a direct result). As Section 588g of the Australian Corporations Act of 2001, which defines insolvent trading, establishes that dividend payments are to be recorded as debts when they are paid or when they are declared, and with Section 254t determining that they are payable if at such time they do not materially disrupt the company's ability to meet its obligations, the delayed insolvency of the company suggests the dividend payments do not qualify as insolvent trading in this case.

Part C

The directors' clear defence in this case consists of insisting that they acted with reliance on a competent and trusted employee, providing information that they had no reason to consider suspect.

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This defence is based on Section 189 of the Australian Corporation Act of 2001, which defines the degree to which directors are allowed to act on the reliance of others rather than obtaining first-hand information. While arguments can be made that the directors had a greater duty of care in determining that George's information was accurate and the actions he recommended were legally allowable, the only director for whom this could possibly have any sticking power is William, who as managing director was himself in a position of supposed competence and accurate information. Section 189 applies equally to William as to the other directors, however, and thus would seem to provide the same protection to him as it does to others. Consequences for any personal breach will be nil, though payments from the company in the form of dividends might be returned if it was deemed they were paid out illegally.

Corporations Act 2001, Section 189; See also Phillip Lipton, Abe Herzberg and Michelle Welsh, Understanding Company Law (Thomson-Reuters 2012) 469.

Lipton, et al., 469.

Deloitte, "Changes to Corporations Law rules for….....

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