Director duties and insolvency in Coco Ltd.'s tax liability case

Australian Corporate Directors

The four step process of understanding business law is very helpful in arriving at some important conclusions about the case of Coco Ltd. And its recent accident. The four step process suggests provides a manner in which this problem can be properly understood and the correct actions may be implemented to prevent further problems. This part of the essay will advise the directors of Coco Ltd. Of their current problems.

Identify the Legal Issue

Before delving into the legal issues of this case it is important to understand the behaviour of Mr. Hugo, a director here at Coco Ltd.. Hugo, in a recent purchase from his in laws' Brett and Sandra cocoa plantation a disastrous terrorist event took place. During the transportation of nearly boat load of cocoa, the ship was attacked and sunk by terrorist pirates disguised as American Navy Forces. The ship was sunk with a missile and the entire crew of 122 were lost. Of more relevance and importance to Coco Ltd. The entire shipment of cocoa was lost.

To make matters worse, the shipment was uninsured and 25% of the payment of this order went down to the bottom of the ocean with the cocoa. As a result of this horrible accident, the company's financial condition has seriously deteriorated and is in bight trouble. Although the company is in this trouble, it continued to trade utile the Australian Taxation Office (ATO) lodged a director penalty notice on the Coco Ltd. And its board members for failure to pay the company's taxes, making the directors possibly liable for these tax obligations.

Several key legal issues arise from this case that must be identified. All directors and officers of a corporation are bound by a number of general law and statutory duties. The Corporations Act clarifies and codifies the existing judge-made legal duties that are imposed upon directors and officers. As a result, there are similarities between the judge-made rules (that is the rules from common law and equity) and the statutory rules. All directors owe the company equitable duties of loyalty and good faith. As part of that duty, directors must:

1. act in good faith in the interests of the company;

2. act for a proper purpose;

3. avoid conflicts of interest; and

Step 3: Apply the law to the facts

Facts are hard to determine in instances such as Hugo and Coco Ltd.'s interesting predicament. The relationship that Hugo has with this business partner clearly demonstrates that this fact is against the legal policy previously described. In addition, since the company experienced the horrible terrorist attack, the company has been in violation of the tax codes as well.

Step 4: Reach A Conclusion

My advice to the board of directors is to fire Hugo immediately and begin paying the back taxes. For civil liability, the Courts can order:

a pecuniary penalty of up to $200,000 under section 1317G;

disqualification from management under section 206C; and/or require payment of compensation under section 1317H.

For criminal liability, if a director or an officer is found guilty of failing to exercise their powers and discharge their duties in good faith and in the best interests of the corporation, or for a proper purpose, may be fined up to $200,000 and imprisonment for up to five (5) years under Schedule

Part 2

The company appears insolvent and certain steps need to be taken in order to correct the errors. If Coco Ltd. is insolvent, do not allow it to incur further debt. This would be irresponsible and could jeopardize your standing with the Austalian Government. Unless it is possible to promptly restructure, refinance or obtain equity funding to recapitalize the company, generally your options are to appoint a voluntary administrator or a liquidator. Voluntary administration is designed to resolve the company's future direction quickly. An independent and suitably qualified person (the voluntary administrator) takes full control of the company to try to work out a way to save either the company or the company's business.

If it isn't possible to save the company or its business, the aim is to administer the affairs of the company in a way that results in a better return to creditors than they would have received if the company had instead been placed straight into liquidation. A mechanism for achieving these aims is a deed of company arrangement. Putting a company into voluntary administration is a simple and quick process. It can be done by the board of the company resolving that the company is insolvent, or likely to become insolvent, and an administrator should be appointed. The directors also need to obtain the written consent of a registered liquidator to act as voluntary administrator.

The purpose of liquidation of an insolvent company is to have an independent and suitably qualified person, or liquidator take control of the company so that its affairs can be wound up in an orderly and fair way for the benefit of its creditors .An insolvency practitioner will be able to advise you of the steps required to appoint a liquidator. Generally, a director-initiated liquidation involves calling a meeting of members to vote on winding up the company and the appointment of a liquidator or applying to Court to wind up the company.

A company most commonly goes into receivership when a receiver is appointed by a secured creditor who holds security over some or all of the company's assets. The receiver's primary role is to collect and sell sufficient of the company's charged assets to repay the debt owed to the secured creditor. A director who is also a secured creditor should seek advice before appointing a receiver. It is also important to ensure that Coco Ltd. ceases trading and commercial acts. This is according to the statuary duties expressed in the Corporations Act.

Part 3

There appears to be some confusion about what Hugo and the board of directors of Coco may be liable for in this case of sloppy management. Masllesons & Tsang (2013) recently wrote that "The Personal Liability for Corporate Fault Reform Act 2012 (Cth) (Liability Act) commenced on 11 December 2012. It was intended to implement the Council of Australian Governments' Director's Liability reform (COAG Reform). The reform initiative aims to remove regulatory burdens on directors and officers (Ds&Os) that cannot be justified on public policy grounds and to minimise inconsistencies between Australian jurisdictions on the application of personal liability for corporate fault in government laws."

The Council of Australian Governments (COAG) has published some more specific punishment guidelines that may be in order for these people. The objective of this initiative is to " ensure that all Australian jurisdictions, and all agencies within those jurisdictions, interpret and apply the COAG agreed principles for assessment of directors' liability provisions (the

COAG Principles) consistently and in accordance with the intentions of COAG.

To that end, the Guidelines flesh out the COAG Principles providing detailed guidance as to what each Principle means, and how it should be applied, in the broad range of legislative and regulatory contexts in which Directors' Liability Provisions might currently exist. They are to be used both to: (a)review existing Directors' Liability Provisions, and where necessary to identify those that need to be repealed or amended in order to ensure consistency with the COAG Principles; and (b)ensure that no new Directors' Liability Provisions are introduced except in accordance with those Principles."

Under the new paradigm, issues relating to corporate criminal liability will inevitably become more closely integrated at an operational level into corporate governance, as corporations like Coco should introduce compliance programs to ensure that their corporate cultures do not potentially trigger criminal liability. It is possible that these reforms to corporate criminal liability may be more effective than directors' duties in recognizing that directors are ultimately accountable for their corporation's culture, and have a corresponding obligation to monitor their companies with more attention and care.

It is clear that Hugo has acted irresponsibly and is putting not only himself but the board of directors in a position that may result in some criminal penalties. Insolvency is nothing to be emotionally scarred about due to the fact that it happens many times over every day. Business is all about risk and assuming risk. Hugo made a mistake but it was made in an effort to help himself and his family out. While this may have little consolation for his family as the impending problems that he will face will be difficult unless he begins to act in accordance with the law.