Question

Orangeglo is a proprietary company that supplies premium light fittings to hotels and offices in Australia and Singapore. Once the market leader, Orangeglow is losing sales because of increased competition and a shift in consumer preference towards brighter lighting. The downturn in sales comes after NotVeryNice Bank agreed to lend Orangeglo $2,000,000 to finance the opening of 10 new offices. The loan is secured against assets valued at $5,000,000. A few months after the loan agreement is signed, Chen, Orangeglo’s Chief Financial Officer, informs the Board that the Covid-19 downturn, combined with production and inventory problems, has devastated the business. Orangeglo needs money fast or one of its many creditors is likely to put it into liquidation. The biggest creditor is NotVeryNice bank.

The Board consists of 4 people, Jim, Simon, Thanh and Kylie. The first three are interested in the technical and design aspects of the business, and they tell Kylie, ‘You’re the smart one with numbers, you work this out.’ Kylie’s intern Elvis tells her that he has a plan to solve the liquidity crisis. Elvis’s schoolfriend Tim works as a dealer at a financial trading company. Tim has information that Titan, a major property conglomerate, is about to purchase another listed property company, Plummet Property, which is nearly bankrupt. When the takeover occurs, Plummet Property’s share price will rise rapidly. If Kylie buys enough shares in the company she will make a huge profit which can be transferred to Orangeglo and provide enough liquidity to pay most of its debts.

Kylie and Elvis approach Chen to release $100,000 from Orangeglo’s cash holdings. They intend to purchase sufficient shares in Plummet Property to potentially make a profit of $2,000,000. Kylie is nervous but Chen is excited. He says, ‘Yes I can authorise that release of funds. Just don’t tell anyone. And I might invest in Plummet shares for myself.’

The removal of $100,000 from the Orangeglo cash account leaves the company unable to pay invoices. Both Chen and the directors ignore creditors’ demands for payment. The company continues to issue new orders and buys office supplies relying on credit granted by the suppliers. Other creditors refuse to supply product to the company and its business comes to a halt. Chen and Kylie reassure the board and company workers that the ‘credit crunch’ will end very soon. They recommend to the directors that the company adhere to a policy of ‘business as usual.’ The directors agree. Soon afterwards, NotSoNiceBank applies to court to appoint a liquidator to windup Orangeglo. The court orders the appointment of a liquidator. A day later, Chen, Kylie and Elvis discover that Titan has decided not to acquire Plummet, and Plummet’s share price falls even further.

How have the various actions of the people described above breached the Corporations Act 2001, and what are the legal consequences of those breaches?

Answer 1

CORPORATIONS ACT 2001 - SECT 197

Directors liable for debts and other obligations incurred by corporation as trustee

(1) A person who is a director of a corporation when it incurs a liability while acting, or purporting to act, as trustee, is liable to discharge the whole or a part of the liability if the corporation:

(a) has not, and cannot, discharge the liability or that part of it; and

(b) is not entitled to be fully indemnified against the liability out of trust assets.

This is so even if the trust does not have enough assets to indemnify the trustee. The person is liable both individually and jointly with the corporation and anyone else who is liable under this subsection.

(2) The person is not liable under subsection (1) if the person would be entitled to have been fully indemnified by 1 of the other directors against the liability had all the directors of the corporation been trustees when the liability was incurred.

(3) This section does not apply to a liability incurred outside Australia by a foreign company.

(4) This section does not apply to a liability incurred by a registrable Australian body outside its place of origin.

Under certain circumstances, directors may be liable for debts incurred by the company when the company is unable to pay those debts, as and when they fall due.

Another way you can become personally liable as a director is where, as a result of you breaching your duties, you have caused the company to suffer some loss.

Under these circumstances you may have acted illegally, be in breach of civil or criminal provisions of the Corporations Act 2001 and you may have to compensate the company for the loss.

Remember, a director’s obligations may continue even after the company has ceased trading and has been deregistered.

Consequences of failing to perform director duties

If you fail to perform your duties as a director, you may:

· be guilty of a criminal offence with a penalty of up to a maximum of $200,000, or imprisonment for up to five years, or both

· have contravened a civil penalty provision (and the court may order you to pay to the Commonwealth up to $200,000)

· be personally liable to compensate the company or others for any loss or damage they suffer

be prohibited from managing a company.

Therefore, as per above said expalainatins & discussions Directors & CFO of the Orangeglo’s are personally liable for the loass incurred by the company as a consequence of their fault in rendering their duties in the capacity of directors & CFO of the company.