Director liability and dividend payments in Hampton Park Ltd.

AUS Corp Law

HP Case Qs

Assuming the facts of this case as presented are true and that there was no deception on the part of any party mentioned in the case, the breach in this case is limited to one individual and one specific decision/action (or inaction). Of Hampton Park Ltd.'s four directors, only William appears to be in a position that would normally be expected to have relevant and up-to-date information regarding the company's financial position and decisions (Gail is mentioned but not described, so it can be assumed that her role is as limited as Jack and Susan's), and while this does not in and of itself limit the liability and the responsibility of the non-managing board members it does, in the given set of circumstances, limit their liability and thus the consequences of any breach and even makes the existence of a breach of duty questionable. Even William, as will be shown, could make a plausible case that he did not breach in his own duty and an even stronger case that liability for any breach in regards to the actions described in the case does not attach. Instead, the breach and any resultant liability fall solely on the shoulders of non-director but chief financial officer George, who failed to remain informed regarding changes to dividend calculation and who failed to inform the board of relevant information in a timely manner.

Though board directors are tasked with the responsibility of making inquiries with relevant officers and employees and taking steps in ensuring the accuracy and rectitude of the information and actions taken, they are also explicitly freed from liability by their right to rely on others.

This includes, "an employee whom the director believes on reasonable grounds to be reliable and competent in relation to the matters concerned."

HP chief financial officer George is unquestionably an employee that matches this description; again assuming all representations made by individuals in the case were made in good faith and were honest/accurate, then George is an experienced financial officer who is quite competent in determining appropriate courses of action and to unquestionably had access to reliable information in regards to the decision(s) under question in this case. His assurance that the paid dividends were reasonably established under profit reportable under the Australian Corporations Act Section 254t had no reasonable reason to be doubted even if the company's financial situation as a whole was deteriorating. The only instance of any wrongdoing and potential breach, in fact, appears to be George's failure to inform the board of changes to the accounting/financial constraints and requirements for the payment of dividends. Again, assuming that the dividends would have been legally payable under the original Australian Corporations Act of 2001, as is indicated by the facts of the case as given, the board would have no reason to question George's information or assessment of the company's dividend-paying capabilities. George's failure to remain informed rests squarely with him.

Section 254t of the Australian Corporations Act of 2001 states that dividends may be paid so long as they do not "materially prejudice the company's ability to pay its creditors," and Section 588g of the same Act states that dividends are considered debts incurred at the time the dividend payment is made or declared, provided the company's constitution allows for such declarations. Though the company's liquidation occurred shortly after the declaration of the dividends, it appears as though the company was still solvent at the time of the dividend and thus the ability to pay its debts was not materially harmed by this dividend payment. The June 2010 change to the manner in which dividends were deemed payable shifted the requirement from a measure of profit to a balance sheet-based formula in which dividends were only payable if assets outstripped liabilities, essentially.

This is, according to the facts of the case as presented, the only reason the dividend payment might be considered insolvent trading or otherwise contrary to the legal and financial constraints of the company under current Australian law. As the error was again solely the fault of chief financial officer George, the directors incur no liability in this instance.

Part C

The directors' clear defence in this case consists of insisting that they acted with reliance on a competent and trusted employee, providing information that they had no reason to consider suspect. This defence is based on Section 189 of the Australian Corporation Act of 2001, which defines the degree to which directors are allowed to act on the reliance of others rather than obtaining first-hand information. While arguments can be made that the directors had a greater duty of care in determining that George's information was accurate and the actions he recommended were legally allowable, the only director for whom this could possibly have any sticking power is William, who as managing director was himself in a position of supposed competence and accurate information. Section 189 applies equally to William as to the other directors, however, and thus would seem to provide the same protection to him as it does to others. Consequences for any personal breach will be nil, though payments from the company in the form of dividends might be returned if it was deemed they were paid out illegally.

Corporations Act 2001, Section 189; See also Phillip Lipton, Abe Herzberg and Michelle Welsh, Understanding Company Law (Thomson-Reuters 2012) 469.

Lipton, et al., 469.

Deloitte, "Changes to Corporations Law rules for payment of dividends." (2010).

Corporations Act 2001, Section 189.