LAW
1 © John ORR
TOPIC 5.2
*****‘TAKEAWAYS’*****
(key points to be remembered)
Directors’ disclosure requirements;
Exoneration and Relief for Breach of Duty;
Ratification and exculpation of breaches of duty;
Insolvent trading & contravention
Ratification
Quarante Pty Ltd v The Owners Strata Plan No. 67212 [2008] NSWCA 258 Sackville AJA
109 …doctrine of ratification , whereby:
“an act done, for another, by a person…acting for such other person, without any
precedent authority, becomes the act of the principal if subsequently [adopted] or ratified
by him.” (Emphasis in original.)
110 There are said to be three elements of ratification (GE Dal Pont, Law of Agency (2nd ed
2008) par 5.7):
¦ the agent whose act is sought to be ratified must have purported to act for the principal;
¦ at the time the agent acted, he or she must have had a competent principal (that is, the
principal must have been in existence and capable of being ascertained); and
¦ at the time of the ratification, the principal must be legally capable of doing the act which
has been ratified.
............
Acting honestly
Australian Securities and Investments Commission v Macdonald (No 12) [2009] NSWSC 714
Gzell J (James Hardie litigation)
17 …Palmer J in In Hall v Poolman [2007] NSWSC 1330 said..”acting honestly for the purposes of
Section 1317S(2) and Section 1318(1) is to be determined by the ordinary meaning of the words,
2 © John ORR
that 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 CA or the general law. A failure to
consider the interests of the company as a whole, or more particularly the interests of creditors, may
be of such a high degree as to demonstrate failure to act honestly in this sense.]
...............
GO TO S 588G
Legal principles and 588G and reasonable grounds for suspecting
ASIC v Plymin, Elliott & Harrison [2003] VSC 123
Mandie J
421. In James v Andrews [2001] NSWSC 1149; (2001) 166 FLR 11 a company registered and in
liquidation in New South Wales and its liquidator were seeking compensation from a director of the
company in relation to failing to prevent the company from incurring debts in New South Wales
while insolvent.
In the course of his judgment, Young CJ in Eq said at 13 - 15:
"The question that one must address when considering whether there was a contravention of s
588G(2) is, assuming that the actions set out in the statement of claim assert a failing to prevent a
company from incurring a debt, where did that failure take place …before addressing that question
one must look to see what the words "failing to prevent" comprehend. The word "failure" is a word
which can have various shades of meaning. …."volitional delinquency”…Then one must look at the
word "prevent". ….the basic concept in the word is that someone intervenes to control a state of
affairs, usually these days by stopping it. So the general flavour of s 588G(2) is that someone has an
obligation to deal with the company's affairs in such a way to stop it incurring a debt, and that that
person is guilty of volitional delinquency in and about that obligation.
(a) The law
In order to satisfy the requirements of s.588G(1) it is necessary for the plaintiff, …to prove that the
company was insolvent and at each time a debt was incurred during the relevant period, there were
reasonable grounds for suspecting such insolvency. …"Reasonable" in this context imports the
standard of reasonableness appropriate to a director of reasonable competence and diligence,
seeking properly to perform his duties as imposed by law (when viewed as a whole) and capable of
reaching a reasonably informed opinion as to a company's financial capacity. In other words, facts
and matters must be shown to exist which would give grounds for a director acting in accordance
with that standard to suspect insolvency
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427…As far as "grounds for suspecting" is concerned, I would refer to and adopt what was said by
Kitto J in Queensland Bacon Pty Ltd v Rees [1966] HCA 21; (1965) 115 CLR 266 at 303:
"A suspicion that something exists is more than a mere idle wondering whether it exists or not; it is a
positive feeling of actual apprehension or mistrust, amounting to "a slight opinion, but without
sufficient evidence", as Chambers's Dictionary expresses it. Consequently, a reason to suspect that a
fact exists is more than a reason to consider or look into the possibility of its existence. The notion
which "reason to suspect" expresses...is, I think, of something which in all the circumstances would
create in the mind of a reasonable person...an actual apprehension or fear... - a mistrust of the
payer's ability to pay his debts as they become due..." [72]