The Court has power to grant relief from a contravention of a civil penalty provision under s 1317S of the Corporation Act 2001 (Cth) (the Act) if, in “eligible proceedings” brought against a person, it appears to the Court that that person has or may have contravened a civil penalty provision, but that he or she had acted honestly and, having regard to all the circumstances of the case (including those connected with his or her appointment as an officer of a corporation), the person ought fairly to be excused for the contravention.
Matters relevant to relief under that section would here include whether the defendant acted honestly; a value judgment whether, having regard to all the circumstances of the case, he or she ought fairly to be excused for the contravention; and whether, as a matter of discretion, the Court should exercise its power to relieve him or her from any liability.
Whether relief from liability should be granted under that section depends not only on subjective honesty but also on the degree to which the relevant conduct fell short of the required standard, the seriousness of the contravention and its actual or potential consequences, any element of impropriety such as deception and personal gain and any contrition of the applicant and the need for general deterrence is also relevant.
History of relief from liability
The power of the court to grant relief from liability has a long history. The provision was first introduced into corporate law statutes in 1907 in England and similar provisions have been contained in all legislation enacted in New South Wales and Australia regarding directors’ and officers’ duties.
Though the relief provisions have been available for over a century, they have only been rarely used successfully. On one view, this may demonstrate an inadequate safety net but fails to properly protect directors and officers from hindsight review. On another view, it may be that actions are not often brought where there is a regional possibility that a defendant may succeed in obtaining relief under section 1317S, in which case the provisions may well be seen as successful in protecting directors and officers from unnecessary litigation.
The most frequently cited decision concerning section 1317S is the decision of Hall v Poolman (2007) NSWSC 1330. In this case the director allowed the company to incur debts while insolvent and was held to have engaged in insolvent trading. However, the court accepted that the director had honestly attempted to settle the company’s indebtedness to the ATO and that, had the settlement proposal being accepted, the company would, in the opinion of competent professionals, be restored to solvency. The court was persuaded that it ought exercise its discretion under section 1317S to grant the director partial relief from liability for the period during which he had made reasonable efforts to return the company to solvency. The director was, however, liable for damages in respective insolvent trading for the period when it should have been apparent that there was no reasonable prospect of the company resolving its dispute with the ATO.
The federal court granted a director complete relief from liability in the case of McLennan V Carroll (2009) FCA 1415. In this case the court was satisfied that the director’s approach to the solvency issues of the company was “that to be expected of a reasonable, commercially experienced director” and that the director or fairly be excused.
A critical fact in this matter was that the director had obtained business advisory services in respect of a number of difficult business decisions he was required to make as to whether he should continue to trade the business of the company. While the director was not able to satisfy the defence to insolvent trading liability set out in section 588H(3)(a)(i), the court found that the advice was received throughout the relevant period which it was reasonable for the director to rely on it and in these circumstances complete relief was appropriate.
However, cases of partial or complete relief a rare. In the matter of Smith v Bone  FCA 319 the Federal Court rejected the director’s claim for relief under section 1317S or 1318. First, the Court found the director had not sought credible advice regarding the financial position of the company during the relevant period of insolvent trading. Second, while the director had negotiated a payment plan with the ATO there was no realistic means of any payment plan being complied with by the company.
In the case of In the matter of Humur Pty limited  NSWSC 1759 Black J heard a claim for insolvent trading brought by a party assigned the benefit of the cause of action by the liquidator of the company. The court held that the claim for insolvent trading was not made out and that the director was therefore not liable for damages under section 588M.
However, given the director was self represented his honour considered in obiter weather section 1317S would have applied had the director being found liable for insolvent trading. His Honour referred to his findings of fact and stated that in his view a claim for relief by the director would have been strongly arguable. While His Honour does not specially set out the grounds for a potential application under section 1317 S, it appears that various findings of poor conduct on the part of the liquidator and his representatives in investigating the conduct of the director and commencing proceedings were relevant.
This conduct included assigning the claim for insolvent trading without court approval, failing to undertake proper factual inquiries as to the basis of the serious allegations of insolvent trading made against the director, the fact that the liquidator had not adequately supervised the conduct of the proceedings brought in his name, and that the solicitors for the plaintiff had a financial relationship with the assignee of the claim which affected their ability to exercise independent professional judgement in the conduct of the proceedings
Other recent decisions where directors have sort to rely on section 1317S have all been unsuccessful. In the case of Pages Property Investments Pty Ltd V Attila Boros & Ors  NSWSC 1270 Black J found that the director’s failure to maintain adequate financial records of the company and his failure to address those matters in his evidence add the consequence that he was not able to establish that he ought fairly be excused for that contraventions. In respect of various claims conflicts of interest involving related parties the fact of the conflict of interest; the financial significance of the impugned transactions the transactions transacting parties led to the illusion that he should not be relieved from liability. His Honour commented that while the director had not established the basis for relief under sections 1317S or 1318 of the Act in respect of relevant contraventions and breaches of fiduciary duties separately, he had fallen even further short of establishing the basis for relief when those contraventions and breaches of fiduciary duty were considered as a whole.
Various temporary measures during 2020 and 2021 to reduce the circumstances in which directors find themselves in position where creditors are able to wind up their companies has certainly had the effect of reducing insolvent windings up. Even more significant has been the government stimulus packages available to businesses since May 2020.
As these temporary measures and support packages come to an end, directors find themselves operating in novel commercial circumstances (often away from the physical office of the business) it is widely accepted then the number of new appointments will inevitably increase, and so will claims against directors. Directors who find themselves defending claims for breaches of the Act, and in particular for insolvent trading, should consider the broad discretion of the court to excuse them from liability.
For instance, directors who have inadvertently engaged in insolvent trading in circumstances where invoices were issued by creditors to physical officers not about drink various lockdowns may have an arguable defence under s 1317S. Also, cases may arise where negotiations with landlords pursuant to government directions take place but following which the directors were nevertheless unable to save the business. In a case involving facts along these lines, it may be open for directors to argue that their actions were reasonable and justify the Court exercising its discretion to excuse them from liability under s 1317S, at least for the period during which reasonable negotiations occurred.
The existence of sections 1317S and 1318 recognises that company officers make decisions that often involve some form of commercial risk often on the basis of information or advice. Since the commencement of the pandemic many company officers have being required to make decisions in an extremely uncertain, commercially challenging and unforeseen environment. While in the past courts have been reluctant to excuse honest but patently contravenous conduct, it may be that COVID-19 related contraventions of the act, in particularly contraventions of section 588G, will be capable of a Court finding that they occurred without moral turpitude on the part of the director.
The most persuasive reason for a court to next discussion is very likely to remain that the director sought professional advice from qualified insolvency practitioners or an insolvency lawyer Sydney. Directors who are concerned about the solvency of their company should continue to seek advice from an insolvency lawyer Sydney as soon as the problem arises, both in the hope that the business may be saved following professional advised, and to establish a basis, in the event that the worst occurs, for them to rely on sections 1317S and 1318.