ILAC corporations example

ISSUES:
Issue 1: Is Patricia an officer of Stadium Enterprises Pty Ltd? And is Dan an officer of Fancy Pants Pty Ltd? Issue 2: Has Patricia breached her duty to act in good faith in the best interests of the company when advising her sister Faye, that SEPL were buying a large amount of shares in FPPL? Issue 3: Has Patricia improperly used company information to gain advantage for herself and/or her sister? Issue 4: Has Patricia improperly used her position to gain advantage for herself and/or her sister? Issue 5: Has Patricia breached the prohibition of insider trading through the use of price-sensitive information when engaging her sister to buy shares in FPPL? Issue 6: Has Dan breached the director’s duty to prevent insolvent trading in FPPL through purchasing a new fabric cutter machine at $300,000? LAW:

Law 1: Section 9 CA – Definition of an officer
Law 2: Section 181 CA – Good faith
ASIC V Adler – Failure to act in good faith and best interests of the company Law 3: Section 183 CA – Use of information
ASIC v Vidler – Improperly using information gained from the position of Director Law 4: Section 182 CA – Use of position
ASIC v Adler – Improperly using his position as a director Law 5: Section 1043A CA – Insider Trading
Law 6: Section 588G CA – Insolvent Trading
APPLICATION:
1.S.9 defines an officer as director or secretary of a company. As we are told that Patricia is a director of SEPL, and Dan is a director of FPPL they are classified as officers under the CA. 2.S.181 states, “Directors must exercise their powers and discharge their duties in good faith in the best interests of the corporation and for a proper purpose” (slides). In this case Patricia has failed to act in good faith of SEPL through advising her sister that SEPL are buying a large amount of shares in FPPL. Because of Patricia’s actions, SEPL lost their chance to buy shares at a lower cost, resulting in an additional cost to SEPL of $100,000. Patricia has not exercised her powers for a proper purpose and in the company’s best interest, thus breaching her duty to act in good faith under the s.181 CA. 3.S.183 states, “a Director of a corporation must not improperly use the information to gain an advantage for themselves or someone else” (slides).

In this case of Vidler, the courts found there was a breach of s.183 as Vidler had used company information gained as a director to invest in shares to make profit for himself. Similar but different to this case, Patricia has breached s.183 of the CA as she has improperly used company information to gain advantage for someone else through advising her sister to buy shares in order to make a profit. 4.S.182 states, “a director must not improperly use their position to gain an advantage for themselves or someone else” (slides). In the case of Adler, the courts found there was a breach of s.182 as he improperly used his position as director to buy shares and gain advantage for himself. Similar to this case, Patricia has improperly used her position in advising her sister to buy shares in FPPL to gain profit. Thus, Patricia has breached s.182 of the corporations act by improper use of her position to gain advantage for her sister. 5.S.1043A “prohibits anyone in possession of non-public, price sensitive information from dealing in, or engaging others to deal in, the shares of a company” (text).

After Patricia gained non-public, price sensitive information about SEPL’s intentions to buy a large amount of shares in FPPL, she immediately told her sister and engaged her in buying shares in FPPL whilst they are still cheap. Because of these actions, Patricia has breached s.1043A under the CA and has been involved in “insider trading” through telling her sister about the price sensitive information. 6.S.588G states, “Directors are under a duty to prevent a company from incurring debts while it is insolvent” (slides). After Dan found out about SEPL buying shares in FPPL he bought a new fabric cutter machine at $300,000 with the company’s credit card, when he was sure that he would not be able to pay all the Company’s current bills. Although Dan was under the impression the company was about to make a lot of money, he went and purchased the fabric cutter while the company was still insolvent and thus breached s588G under the CA by not exercising his duty to prevent the company from incurring debts while insolvent. CONCLUSION

We can advise ASIC that on the balance of probabilities, as an officer of SEPL Pty Ltd, that Patricia has breached s.181 by not acting in good faith, s.183 by improper use of information, s.182 by improper use of position, and s.1043A by insider trading. She has done this by sharing price sensitive
information she had gained as director, with her sister, advising her to buy shares in a company to gain advantage and make a profit. We can also advise ASIC that on the balance of probabilities, as an officer of FPPL Pty Ltd, that Dan has breached s.588G of the CA by insolvent trading through purchasing a $300,000 machine when he knew the company was in debt and insolvent. Accordingly, the court may order Pat and Dan to pay a fine of up to $200,000 under s.1317G; Pat to compensate for the company’s damage suffered under s.1317H; and Pat and Dan to be disqualified from managing corporations under s.206B(1); or even order the company’s to be wound up under s.233CA.