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]