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Question 1

The corporate veil is a legal term and it is a form of protection provided to directors of a company who act in
the best interest of a business entity but their decisions failed to bring favourable outcomes for the company.
In such cases, shareholders often sue directors for inefficient performance and non-achievement of target
profit but directors are not held accountable by the court under the dual entity concept of the company but if
the following conditions are met:
● There is no personal interest of directors in taking a business decision that brings unfavourable
outcomes
● Directors act in good faith and met their fiduciary duties while entering into contracts that later
become non-profitable for the company

The case study of Salomon v Salomon Pty Ltd is also based on this concept of separate legal personality and
corporate veil. In this case, Mr Salomon who was working as a sole trader, transferred his business into a
limited liability company (Salomon Ltd) and thus legal requirements related to his business as per law are also
revised (Brotchie and Morrison et al 2020). So Salomon became an agent of this company and entered into
various contracts [Lee vs Lee Air Farming Limited (1960]. Unfortunately, his company suffered financial crises
and went into liquidation. Creditors started filing suit against Saloman for repayment of their debt but the
court gave orders that Saloman is not personally liable for debts of a limited liability company because the
company has separate existence and debts can be recovered from the company only. It gave rise to Salomon
rule and a firm base of the corporate veil concept was also formed (Keay, and Welsh, et al, 2015).

Later when similar cases arose then in exceptional circumstances court started lifting the corporate veil which
means that the concept of a separate legal entity is not applicable in this case and individuals who are
managing operations of the company are held liable for breach of their fiduciary duties and not acting in the
best interest of company as per Ca section 181. So due to negligence and frauds of directors of the company,
the court lifted the corporate veil stating that directors do not take decisions of the company as per BJR so
they are held personally accountable for loss suffered to the company due to their negligence (Ellis et al. 2016).
So such cases when directors personally pay all the loss of company and shareholders can also sue directors,
are classified under lifting of corporate veil cases. Some of the fraudulent acts that can hold them liable for
company loss are:
● Reducing the number of members below the statutory requirement
● Failure to refund the fee of application by directors of the company
● Misuse or missed instruction of name of the company by entering into personal contracts on behalf of a
company
● Making separate profit by using company's trade secrets or sale of entity's trade secrets to any third
party
● Fraudulent trading by understating expenses for overstating sales for showing increased profit (Datt, et
al, 2019)

Some of the relevant cases of the lifting of corporate veil are listed below:
● Gilford Motor Company vs Horne (1933).
● Daimler Co. Ltd vs Continental Tyre and Rubber Co. Ltd (1916).
● Sir Dinshaw Maneckji Petit (1927)

Question 2
Yes! Company Hornsby Pty Ltd is bound to repay the loan to the bank under provisions of the Corporation Act,
2001.

Explanation

In the given case study it is mentioned that Peter and John are only directors and shareholders of a company
Hornsby Pty Limited. On 1st July 2021, Peter filed a loan application of $50000 to ABC Bank. The company has
been in a business relationship with this bank for many years so the bank manager did not believe that Peter is
doing a fraudulent transaction by asking for a loan on behalf of the company without informing another
director John and thus John's consent is not involved in this matter. Peter breached his fiduciary duties to
inform other directors about any decision or loan taken on behalf of the company under Ca section 181. He
also misused his authority and used his implied power to obtain a loan in a fraudulent manner. This resulted in
a breach of his director's duty under Ca section 184.

Law has provided guidelines regarding the execution of a contract by a company without its common seal as
per Ca section 127 if at least two directors sign a particular document on behalf of the company. Here only
Peter signed a contract and also forged John's signature and made an excuse in the bank that he was busy.
Although this document is not valid, the bank can rely on the assumption that it has two signatures and thus
the loan is approved (Florey et al, 2012).

Further, if we talk about the enforceability of this loan contract then it is valid and the bank is not liable in this
case because its management assumed that Mr Peter was acting in good faith and consent of Mr John would
have been obtained by him. This assumption is valid and made by the bank under Ca section 128 which
provides the right of making assumptions in business relations if they are based on fair backgrounds and
relevant history.

So a bank can sue the company in case of non-payment and thus the company being a separate legal entity is
liable to pay its debts. However, John can sue Peter for this fraud and for breach of his fiduciary duties to act in
good faith and the best interest of the company. John can file a suit to recover all the amount from Peter as
the company suffered a loss due to his fraudulent actions. But the default of one director would not limit the
liability of the company to repay the loan. However, being a limited liability company, the bank can only
recover the amount up to the extent of the available assets of the company and owners are not held
personally liable (Grinšpane, et al, 2020).

Question 3

Directors act as stewards of the company and they are appointed by members for managing routine
operations in an effective manner. There are also bonuses on the growth of the company and on earning
higher profits than expected. As remuneration of directors depends upon their efficiency to make a company
profitable so there is a high risk that directors adopt fraudulent or illegal means for achieving profit targets by
understating expenses and overstating sales. This is the reason regulatory bodies like ASIC in Australia have
made laws related to director duties and in case of breach of any duty, penalties would be applicable as per
Corporation Act, 2001.

In a given case study of Gorden Pty Ltd, there are three directors named Samuel, Anna and Sarah. The
company has business operations related to selling toy products to retail customers and is recently facing high
competition due to the opening of a new retail shop nearby. In such circumstances, as customers of a company
are shifting to a new retail shop, directors are feeling stressed as they would not be able to manage profit
targets and hence performance of their company would be affected, which would ultimately impact their
remuneration or bonus. It could also lead to the dismissal of directors by shareholders due to inefficient
performance in the company. So on seeing this situation, Samuel decided to increase the range of their toys
and thus looked for a large retail shop. He took this decision alone and started visiting shops without informing
other directors [Ngurli v McCann].

Although he is acting in good faith of the company as per Ca section 180, he is breaching his duty to provide
information and obtain the consent of other directors before making any business plan as per Ca section
184(1). Samuel has selected a store for purchasing goods although he is aware of the fact that this transaction
would put financial pressure on the company. He is breaching his duty to prevent entering into any transaction
that results in insolvent trading and liquidating the company as per Ca section 588G.

Further, at the board meeting, he is acting as he has not done anything on his own and has the intention to
take advice from the other two directors for entering into a purchase contract with a retail shop in North
Sydney. [Re Smith & Fawcett]. Other directors Anna and Sarah are not sure about this transaction as they both
have the idea that it would cause pressure on company finances. But still agrees to enter into the contract due
to security provided by Samuel that it is safe and we do not have enough time for this as customers are already
switching. Here both Anna and Sarah breached their fiduciary duties of not fully investigating the impact of this
transaction on their company. They released the proposal Samuel believing he is acting in good faith but this
does not limit their responsibility to make business decisions with loyalty in the best interest of their company
[Equities v Carr].

So in the given case, all three directors of Gorden Ltd are liable for their negligent acts and for breaching their
fiduciary duties as per Corporation Act, 2001.

Question 4

Directors of any company are appointed by shareholders as their agents and for managing the operations of a
business entity in its best interest by taking efficient decisions that would result in increased performance
efficiency of the company and contribute towards its growth. As directors and shareholders are separate in
most of the entities so the law has made various rules for directors to meet their fiduciary duties while taking
decisions on behalf of the company. Breach of any of the duties of directors as per Corporation Act 2001
results in penalties that could even lead to imprisonment in severe cases (Brotchie, and Morrison, et al, 2020).

The case study relates to Sydney Property Investment Limited which is a company whose main operations are
sale, acquisition and development of properties. The directors of the company took a decision of buying land
for $3 million from a company Waterview Pty Limited on 1st July 2021. Danny, who is a shareholder of that
company, did not disclose the fact that this land was bought for $2 million a year ago and thus this transaction
is beneficial for Waterview Pty Ltd as Danny's wife and son are also shareholders there [Greenhalgh v Arderne
Cinemas].

Non disclosure of personal interest is considered as a potential breach of the director's duty. Danny is liable for
this violation in the given case. As per Ca section 180(1) it is the primary duty of a director to act with care and
diligence while taking decisions of his company and in the current case, Danny breached this duty by not
thinking about the interest of Sydney Property Investment Limited. A director is also liable to prevent his
company from insolvent trading as per Ca section 588G and Danny is not disclosing his interest in undergoing
matters and letting the transaction be processed just because he has a personal interest. Any loss suffered by
the company later in this regard would be Danny's liability [Brunninghausen v Glavanics].

Further, a director is held liable by the court to disclose his material personal interest in any matter as per Ca
section 191 and Danny breached this duty also. A director should not attend and vote at any meeting which
involves his personal interest but Danny voted in favour of this transaction and thus proposal was approved on
8th July 2021.

Violation of all the above mentioned fiduciary duties raised questions on the integrity of Danny and also made
him a disqualified director as he did not use Business Judgement Approach in case of this transaction. Director
is strictly prohibited to prefer his self-interest over the company's personal interest and Danny is involved in
breaking this rule so he would be penalized as per Ca section 184.

Question 5
Differences between receivership, voluntary administration and liquidation

Receivership can be defined as a legal process in which a receiver is appointed weekly as a custodian for
protecting a business or assets of a company. Appointment of receiver means that management is no longer
involved in operations of the company and all decisions regarding assets and liabilities are taken by
independent receivers in the best interest of the company and creditors. It is often done when management
fails to manage the operations of a company effectively and the company is about to liquidate (McCormack,
and Hargovan, et al, 2015).

On the other hand, voluntary administration is defined as a process in which the management of a company
analyses the situation of financial difficulty and takes the decision of announcing the winding up of the
company as operations cannot be performed in a smooth manner (Ellis, et al, 2016). An administrator is
appointed voluntarily for taking decisions with regard to Assets of the company and providing creditors with
their debts by best allocation or sale of existing assets and resources. There are mainly two stages involved in
the voluntary administration procedure. In the first stage, an administrator is appointed and a meeting with
creditors is conducted for making their committee of directors. In the 2nd Stage, creditors are given the
decision of deciding the future of the company (Stubbs, et al, 2017).

The liquidation procedure of a company is complete when the court is satisfied that it has become insolvent as
per Ca section 459A. Where insolvency can be defined as a condition in which a company is not able to pay its
debts and its liabilities become more than its debts as per Ca section 95A.

Key aims

There are different aims of selecting different approaches in case a company is not able to pay its debt and
there is a financial crisis in public. These are given below:

Aim of Receivership

The key aim of the appointment of receivers is to make efficient decisions for the stability of the company
again. In a receivership, all the possible situations in a company are analysed for taking the best decisions and
looking for opportunities in order to ensure that the survival of operations continues. So a receiver helps a
company through his independent decision-making power rather than winding it up in a financial crisis as per
section 50 of the Insolvency Practice Schedule.

Aim of Voluntary Administration

As per Ca section 435A, the aim of voluntary administration is to enhance the chances of the company to
continue its existence. And in case if the existence of the company is not possible then selecting an option to
return for the company's creditors and members by taking the decision of immediate voluntary windup of the
company (Hinze, et al, 2017).

Aim of Liquidation

Liquidation results in the death of the company by its deregistration. The aim of appointing a liquidator is to
cease all operations of the company at the official level by the announcement to third parties as per Insolvency
laws in Australia. Liquidation mainly aims to ensure the winding up of the company in a fair manner.

Reference:

Brotchie, J. and Morrison, D., 2020. Insolvent trading and voluntary administration in Australia: economic
winners and losers?. Accounting & Finance, 60(1), pp.409-434.

Datt, K., 2019, June. Tax system integrity and directors' obligations under the'Corporations Act': A tale of two
systems. In Australian Tax Forum (Vol. 34, No. 2, pp. 277-307).

Ellis, P., 2016. To find a standard format that measures the activities of a Micro, Small or Medium Business
Entity. A Pitch. Accounting and Management Information Systems, 15(2), p.420.

Florey, K., 2012. State Law, US Power, Foreign Disputes: Understanding the Extraterritorial Effects of State Law
in the Wake of Morrison v. National Australia Bank. BuL Rev., 92, p.535.

Grinšpane, A., 2020. Piercing the corporate veil: development of the approach.
Hanrahan, P.F., Ramsay, I. and Stapledon, G.P., 2013. Commercial applications of company law. COMMERCIAL
APPLICATIONS OF COMPANY LAW, CCH Australia Ltd,.

LaChance, C.M., 2013. Third Circuit Holds Chapter 15 Relief Extends to Assets Managed by Australian
Receivership. American Bankruptcy Institute Journal, 32(10), p.50.

Keay, A. and Welsh, M., 2015. ENFORCING BREACHES OF DIRECTORS’DUTIES BY A PUBLIC BODY AND
ANTIPODEAN EXPERIENCES. Journal of Corporate Law Studies, 15(2), pp.255-284.

McCormack, G. and Hargovan, A., 2015. Australia and the international insolvency paradigm. Sydney Law
Review, The, 37(3), pp.389-416.

Stubbs, W., 2017. Characterising B Corps as a sustainable business model: An exploratory study of B Corps in
Australia. Journal of Cleaner Production, 144, pp.299-312.

Hinze, C., 2017. Eight key points to keep in mind when setting up a new entity in Australia. Governance
Directions, 69(6), pp.361-363.