Introduction
This research essay will be discussing the issues that are confronted by the directors of Hampton Park Pty Ltd (HP). The directors, William, Jack, Susan and Gail had their company liquidated shortly after declaring the dividend to their members. Unbeknown to the directors, the Chief Financial Officer of HP, George has been withholding information regarding the company’s deterioration of their financial position. Although late in realizing, George also failed to inform the board regarding the change in the dividend payment rules before the signed off their financial statement in 2010. The new payment rules that was enforced on 28 June 2010 stated in s254T of the Corporations Act 2001 points out that the company’s asset must exceed the liabilities immediately before the dividend is declared and the excess must be sufficient for the payment of the dividend. The company than went into liquidation after the dividend was paid. These issues will be discussed in further detail throughout the essay by examining the directors’ duty of care and the directors’ duty to not trade whilst insolvent and whether there is any breaches of these duties. These duties are set up to allow directors hold accountability and to minimize risk of wrongful or illegal behavior.
Duties of a “Director”
The term “director” is clarified under s 9 of the Corporations Act 2001, which states that “definition of a 'director' includes those appointed to the position of a director, an alternate director and those acting in the position even if not validly appointed. It also includes those persons in accordance with whose wishes the directors of the company are accustomed to act. With becoming a director, there is a scope of duty that is to be obliged by the directors within the fiduciary duties and statutory duties. Under common law, duties of a director or officer are; i) To act to bona fide (in good faith) in the interest of the company; ii) To exercise powers for a proper purpose; iii) To retain discretionary powers iv) To avoid undisclosed conflicts of interest v) To provide a duty of care, skill and diligence

Meanwhile, the statutory duties of a director are; i) To act with reasonable care and diligence (s 180(1)) ii) To act in good faith in the best interest of the company (s 181) iii) To act for proper purpose (s 181) iv) Not to use their positions as directors for personal gain (s 182(1)) v) Not to make improper use of information gained whilst acting as a director for personal advantage or for detriment or disadvantage of the company (s 183(1)) vi) To disclose any other material personal interest in a transaction involving the company to the other directors. vii) to prevent the company from trading if it has become insolvent (s 558G)

In contrast with the case of Hampton Park Pty Ltd, this research will be discussing more into the statutory duties of the directors in their duties to act with reasonable care and diligence (s 180 of Corporations Act 2001(CA)) and their duty to prevent the company from trading if it has become insolvent (s 558G of CA) due to nature of the cases. 1. Directors Duty of Reasonable Care and Diligence

Assessing the case of HP and their directors, it is stated the directors have entrusted the running of the company to one of the directors, William, whom in turn entrusts the company’s Chief Financial Officer (CFO), George, to foresee the company’s financials. Problem arises when George declines to disclose the true nature of the company’s financial situation being in deterioration to the board. Instead, George gives out favorable advices to the board which in turn causes the company to be liquidated.
As stated in s 180(1) of the Corporations Act 2001, a director or other officer of a corporation must exercise their powers and discharge their duties with the degree of care and diligence that a reasonable person would exercise if they: * were a director or officer of a corporation in the corporation’s circumstances; and * occupied the office held by, and had the same responsibilities within the corporation, as the director or officer.

Although the ‘skill’ component from the common law is omitted, the ‘skill’ component still is fundamental. With that, this test used is an objective test to find out whether the actions of a normal person holding the same position and responsibilities would make in the same situation. In AWA v Daniels (1992), an almost similar situation happened between the AWA directors with the companies officer in charge of the foreign currency trading, Koval. The judge held that the auditors and the directors were liable for negligence due to the fact that the directors of AWA had failed to put in place an effective internal system to monitor the proper conduct of the audit. In the case of Re City Equitable Insurance Co Ltd (1925), which was the first important case under duty of diligence and care, Judge Homer J stated that directors must exercise such degree of skill and diligence as would amount to the reasonable care, which an ordinary man might be expected to take, in similar circumstances, if their business were their own.
Section 180 incorporates a business judgement rule under s 180(2) of the Corporation Act whereby the director must; i) Make the judgement in good faith for a proper purpose; ii) Not have a material personal interest in the subject matter of the judgement; iii) Inform themselves about the subject matter of the judgement to the extent they reasonably believe to be appropriate; and iv) Rationally believe that the judgement is in the best interests of the corporation.

In order for the director to satisfy the statutory duty of care and diligence in respect of the particular business judgment, these requirements have to be fulfilled. Reflecting back to the current situation, it could be concluded that the directors and officers are in breach of the duties of due care and diligence by failing to provide accurate and complete information to be given to the shareholders. Shown from the judgment in the ASIC v Vines (2003), it was held that Vines had failed to act with care and diligence in relation to the accuracy of profit forecasts
Statutory Remedies
A breach of s 180–183 and 588G requires the court to issue a declaration of contravention under s 1317E.The issuing of a declaration is significant because it allows ASIC to apply for a pecuniary penalty order under s 1317G, and to apply to the court for an order that the director be disqualified from managing corporations under s 206C.
The court may also order that:
• The director pay damages to the company: (s 1317H.)
• An injunction be imposed restraining the future breach of duty: (s 1324).
• A receiver be appointed over the property of the company: (s 1323)

2. Duty Not To Trade Whilst Insolvent

Hampton Park Pty Ltd is stated to be liquidated post declaring the dividend payments to the members. There are provisions of the Corporation Act that regulates insolvent trading through sections 588G – 588Z of the Corporations Act 2001.
S 588G(1) imposes a duty towards directors to prevent a company from engaging in insolvent trading. This section applies if; a) The director was a director of the company at the time when the company incurs a debt; and b) The company is insolvent at the time of the incurring the debt or becomes insolvent by incurring that debt or by incurring at that time debts including that debt; and c) At the time there are reasonable grounds for suspecting the company was insolvent or would become insolvent as a result of the transaction; and d) That time is at or after the commencement of this part, that is 23 June 1993.

From s 588G(1)c, it is stated that there has to be ‘reasonable grounds’ for suspecting that the company is insolvent at the time. Therefore, in tackling this issue of insolvent trading, the meaning of ‘reasonable grounds’ and insolvency needs to be considered. With that, s 588G(2) provides for two distinct ways in which a director can be under suspicion * Actual awareness, that is if the person is aware at that time that there were such ground for so suspecting; (s 588G(2)(a)) or * Where a reasonable person in that position would have been aware of (s 588G(2)(b))

The test set out in s 588G(2)(a) is a subjective test. The test set out in section 588G(2)(b) is an objective test.

Therefore, if it cannot be determined the director had any actual awareness of reasonable grounds for suspecting insolvency; the director would still be liable if the objective test was set in place. In this case, whether a reasonable is person in the director’s position would have been aware. Judge Einfeld J, stated in similarity in the case of Metropolitan Fire Systems Pty Ltd v Miller (1997) and held that a judgement should be determined by the standard appropriate knowledge to a director of ordinary competence.

Application to Current Situation
The inability to produce timely and accurate financial information to display the company’s financial position is one of the common indicators of insolvency. This is one of the many reasons that the company had to be liquidated. By placing s 588(2)b in context of this situation, the directors should be aware of the financial positions of the company as how a normal person would be in their position. Therefore, it is believed that the directors of HP did breaching their duty to not trade whilst insolvent.
2.1 Statutory Defence Available To Directors
Section 588H contains a number of defenses to insolvent trading. The defenses in s 588H, which are examined below in turn, are:

* reasonable expectation of solvency (s 588H(2)); * reliance on others providing the information on the solvency of the company (s 588H(3)); * illness or some other good reason resulting in absence from management (s 588H(4)); and * reasonable steps to prevent the company from incurring any debts (s 588H(5)).

In relation to the current case, the directors may use s 588H(3) as their defense for relying on George for the information on the solvency of the company. There are aspects that they have to prove in order for this defense to stand. Those elements are

* the director relied upon information provided by another person; * the director had reasonable grounds to believe that the other person had the responsibility of providing the director with information about the company’s solvency and was competent and reliable in performing this role; and * the information provided allowed the director to expect that the company was solvent and would remain solvent even if it incurred the debt.

If the courts reject the application of the pleaded defences, therefore, directors may need to turn to s 1317S and 1318 to avoid liability which provides relief for the person for acting honestly and ought to be excused. 2.2 Penalties of Breaching Duty To Not Trade Whilst Insolvent
If the elements of s588G does coerce, the respective director may be liable to civil penalties under s 588G(2). A crime will be commited if the director commits a criminal offence under s 588G(3) by acting dishonestly. If the director is to be found guilty of both civil and criminal offense, the director would face a fine penalty, be barred from being a company director within a certain timeframe or face imprisonment. In the case of HP and the directors on the other hand, it would seem that the directors would only face civil charges since none of the directors have acted dishonestly by trading during insolvent.

Conclusion
Therefore, from the points discussed above, it can be concluded that the directors of HP are in breach of both care and diligence and also insolvent trading. Summarizing the research, it is clear that when it comes to “care and diligence” and also “insolvent trading” it is critical to practice a “reasonable” amount of care and diligence towards the company and its assets.

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[ 2 ]. Australian Company Incorporation Services (ACIS);”New Dividend Payment Rules”, http://www.acis.net.au/bulletins/dividend.pdf
[ 3 ]. Daniels v Anderson (1995) 37 NSWLR 438
[ 4 ]. AWA v Daniels (1992) 9 ACSR 383
[ 5 ]. Re City Equitable Fire Insurance Co Ltd [1925] Ch 407
[ 6 ]. Halsbury Law of Australia [120-7456]
[ 7 ]. Asic v Vines (2003) 48 ACSR 322; [2003] NSWSC 1116
[ 8 ]. Metropolitan Fire Systems Pty Ltd v Miller (1997) 23 ACSR 699
[ 9 ]. ASIC v Plymin (No 1) (2003) 46 ACSR at 386