Sections of the Corporations Act You May Have Missed #003

Scene: you are a company director. The business has been profitable, but recently has fallen on hard times and incurred significant liabilities. Determined, you have consulted accountants, lawyers, experts: all have reassured you that the company’s health will improve should you proceed with specific plans of action. Despite your endeavors, however, the company’s downfall becomes inevitable, and the liquidators are brought in. All of a sudden, ASIC’s at your door – and they’ve brought the liquidator with them. You’re on the hook for breach of duty, negligence, losses from insolvent trading – you name it.

Game over, right?

Wrong.

Luckily, you know (in part because of a certain series of posts on overlooked Corporations Act provisions) of the court’s power to absolve you of your corporate sins under sections 1317S and 1318 of the Corporations Act! Enter: the handy Beginner’s Guide to Absolving Your Corporate Sins, where we illuminate the three hard questions you must ask yourself to seek the court’s exoneration.

The necessary preamble – what do these provisions achieve?

Section 1317S of the Corporations Act allows the court, if proceedings have been or will be commenced against you for a contravention of a civil penalty provision (or also, notably, for recovery of compensation for insolvent trading losses), to relieve you, in whole or in part, from liability. Section 1318 provides an identical power to relieve, but this time for liability in any civil proceeding for negligence, default, breach of trust or breach of duty.

Importantly, both sections rely on the court being satisfied of your honesty, and that you ought fairly to be excused from liability. As such, courts have determined that the criteria, and stages for inquiry, are identical for both (see, for example, ASIC v Healey (No 2) (2011) 196 FCR 430 at [84]). These stages of inquiry form the following

Question 1: Have I acted honestly?

Honesty is (almost) everything; no corporate wrongdoer can expect exoneration if they have been dishonest.

In asking yourself this question, do not lead yourself down a rabbit-hole of technical meaning; for ‘honesty’ is to be considered only in its ordinary meaning (Hall v Poolman [2007] NSWSC 1330). You will be judged as honest if you have acted without ‘deceit or conscious impropriety’; without ‘intent to gain improper benefit or advantage’ for yourself; and without ‘carelessness or imprudence to such a degree as to demonstrate that no genuine attempt at all’ has been made to perform your duties.

Whether you are honest may operate distinctly from any finding of the liability you are seeking relief from. In Hall v Poolman, the Supreme Court of NSW, in considering s 1317S, made a positive finding of honesty on the part of the Chairman of Directors, notwithstanding the finding that there were reasonable grounds for suspecting insolvency and that the Chairman of Directors had continued to allow the company to trade. 

Question 2: Ought I fairly to be excused?

Honesty, however, will only get you so far – and does not guarantee you ought fairly to be excused (Morley v ASIC (No 2) (2011) 83 ACSR 620 at [49]).

In asking whether you ought fairly to be excused, you (and the court) are required to look to all of the circumstances of the case. This may involve considerations of whether you acted reasonably (although this is not a requirement); the seriousness of your contravention and its potential or actual consequences; and whether you were deceptive or sought personal gain (which is also relevant to your honesty). Of course, any other relevant circumstance can and should also be taken into account.

For a court, this question is not an exercise of discretion; rather, it is a value judgment (Morley v ASIC).

Question 3: To what extent should I be absolved of my sins?

You have acted honestly, and the court has judged that you ought fairly to be excused – but to what extent, if at all, should you actually be granted relief?

It is very rare for a court to grant full relief from all liability in a civil proceeding – but it is possible. In McLellan v Carroll [2009] FCA 1415, Goldberg J relieved the respondent entirely from all liability for his contravention of s 588G, having regard to the extensive advice he obtained and relied upon in the leadup to and during his breach. In other circumstances, a court may grant relief in respect of one breach but not another; or impose pecuniary penalties but not disqualification bans.

One may engage in much speculation as to where the cards may fall. If, however, you are deemed worthy of relief, then ss 1317S and 1318 may just prove to be your saving grace.