Question

Eddy is the Managing Director and Franco is the Chief Financial Officer of Sunny Solar Pty Ltd (“Sunny Solar”). The company decided to acquire Green Go Pty Ltd (“Green Go”) that produces solar powered gardening equipment. Eddy believes environmental products are a profitable investment for Sunny Solar. Before proceeding with the acquisition of Green Go, Eddy read a couple of pages of the 40 page financial report on Green Go that was prepared by Franco. In the report, Franco had reported that the sales revenue of Green Go had declined over the past 12 months. Further, Franco had recommended that Sunny Solar obtain an independent appraisal of the proposed investment before proceeding with the acquisition. Eddy proceeds with the acquisition and did not seek an independent valuation of Green Go. Unfortunately, Green Go’s business declines even further, and Sunny Solar loses a significant amount of money. In July 2019, Eddy ordered glass panels to the value of $250,000 from Glass Makers Pty Ltd, a glass manufacturer that Eddy had previously done business with. The order was placed in the name of Sunny Solar. Four months before the order was placed, Sunny Solar was experiencing financial problems – the government had removed the solar panel installation rebate without warning – and Sunny Solar was having trouble paying its debts. Eddy failed to pay sufficient attention to Sunny Solar’s financial situation, and only realised it was in serious trouble a month after the order had been placed. When the glass was delivered in August, Sunny Solar could not pay the account and it has remained unpaid. Glass Makers Pty Ltd is now suing both Sunny Solar and Eddy. Advise ASIC of TWO claims that could be brought against Eddy as the managing director of Sunny Solar Pty Ltd for breach of the duties under the Corporations Act 2001 (Cth) and the supporting common law.

Answer 1

Eddy is the Managing Director of the Sunny Solar Pty Ltd. The director of a company has certain rights as well as duties. The employees as well as the other directors show complete faith and trust in the Managing Director of the company.

MD is also the person who is responsible for taking quick as well as efficient decisions for the operations of the enterprise. It is quite evident that a company chooses its managing director wisely, keeping in mind the qualifications for the position. In the present scenario, the company trusted Eddy for an acquisition deal.

Moreover, the person who made a report about the financial position of Green Go also advised Eddy to conduct an independent financial analysis. It would have helped him to foresee and predict the financial losses Green Go suffered.

Now, the company can contend against Eddy and hold him liable based on two issues.

The first claim is that Eddy, as a Managing Director of the firm, failed to adhere to his duties provided under the Corporations Act. The act clearly states that the director must act with care and due diligence. Here, Eddy didn’t conduct the independent financial analysis, which clearly shows his negligence.

The second claim against Eddy is that he must have acted in good faith. The Corporations Act also states that a Director must not have Mala fide or false intentions. It is his/her duty to behave for the benefit of the firm. Thus, the enterprise can bring a civil suit against Eddy based on the mentioned contentions and claims.