Group question

Since the company started, Farm 2 Home Pty Ltd always employed an accountant. The company’s financial records were kept on a computer, accessible to all directors, and maintained by the accountant each month. In January 2017, Kevin and Faith decided to appoint a new director Terry. Terry previously worked as a consultant in the food industry and with his strong marketing skills, Terry was invited to become a non-executive director and chairperson of Farm 2 Home. Terry also has a strong background in operational management but has no experience in corporate financial management. Terry accepted the invitation because Kevin and Faith were friends in need of help with business marketing and also because ‘by all appearances’ the business was back on its feet after Christmas 2016 and thriving. Prior to accepting the appointment, Terry met with the other two directors at a formal board meeting. The minutes of the board meeting records that the company’s accountant was also in attendance and that the only item discussed related to the general performance of food delivery services in New South Wales.

Within 12 months of Terry’s appointment as a director, Farm 2 Home ceased trading in January 2018 with outstanding debts of $750,000. In December 2017 the company appointed a voluntary administrator who was appointed as the liquidator in February 2018. The liquidator, in taking legal action against all of the company’s directors for insolvent trading, has successfully proved in court that the directors breached s 588G of the Corporations Act 2001 (Cth).

The evidence showed that Faith accepted her appointment as a director of Farm 2 Home at Kevin’s request but was happy at all times to leave the management of the company to him. Each year Faith signed the company’s annual returns declaring the company was solvent, but this document was not explained to her and she said: “I have complete trust in my husband whom I love very dearly and therefore I would sign documents whenever asked.”

Terry and Faith now seek to rely on a statutory defence in s 588H of the Corporations Act 2001 (Cth). With reference to the Corporations Act 2001 (Cth), relevant cases and the facts above, advise: (a) Terry; and (b) Faith, as directors of Farm 2 Home, of their chances of success in avoiding personal liability. Follow the HIRAC method of legal problem solving.

Essential Readings:

HHA Chapter 18 only paras [18.1-18.3] and [18.10-18.23]

Corporations Act 2001 (Cth)

·             Duty to Avoid Insolvent Trading and Defences to Insolvent Trading: ss9, 95A, 588G, 588H, 1317S

Cases

·             DCT v Clark [2003] NSWCA 91; refer HHA para 18.20

·             Morley v Statewide Tobacco Services Ltd [1993] 1 VR 423; refer HHA para 18.20

 

 

students must follow the HIRAC method (see How to think like a Lawyer (and write like one too!) 

written answer maximum 1000 words