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ADDITIONAL LEGAL MEASURES TO PROTECT STAKEHOLDERS’ INTERESTS

  1. The interests of shareholders and creditors are also served by a number of significant provisions in the Corporations Act.
    • Companies may pay dividends only if their assets exceed their liabilities (to be calculated in accordance with Australian GAAP); if the proposed dividend is fair and reasonable to the shareholders as a whole; and if the payment does not materially prejudice the company’s ability to pay its creditors.
    • Directors are subject to statutory duties, including a duty of care and diligence. They may be personally liable to compensate the company or others for any loss or damage they suffer as a result of their failure to comply

with their duties. They also commit a criminal offence if they fraudulently induce parties to give credit to their company or if they defraud their own company.

Directors are required to protect the interests of creditors by not trading while insolvent. Specifically, this means that they may not incur debts when their company is insolvent, or allow their company to become insolvent by incurring that debt. The latter applies, for example, when the company pays a dividend and the company becomes insolvent as a result. Directors who infringe this rule are subject to civil and criminal penalties. Holding companies are additionally liable for the debts of their subsidiaries if the parent has permitted the subsidiary to trade while insolvent.

Directors who fail to comply with their statutory duties, not only in respect of financial reports but also in numerous other cases, may incur civil penalties of up to 2,000 penalty units (units subsequently convert to financial amounts) or up to five years’ imprisonment, or both. The courts will take into account whether a particular contravention has materially prejudiced the interests of the company or its members or has materially prejudiced the company’s ability to pay its creditors.

Directors may be disqualified from holding office for breaching their duties.

Shareholders may apply to the courts to intervene if they consider that the company’s affairs are being conducted in a way that is unfair either to shareholders or the company itself.

While it appears to happen rarely in practice, the law allows individual creditors of a company in liquidation to seek permission to take their own direct action to recover debts owed to them, ie without waiting for the liquidator to act on their behalf.

 
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