Question

Bill, Amy and Paul are the directors of Mind Your Mine Pty Ltd (“MYM”) which owns a number of upmarket retreats in Australia. The retreats typically charge $2,000+ per person, per night. Business was going well, and the company was looking to expand. Bill’s niece owned vacant land near Mt Tambourine, Queensland. The niece was having financial difficulties after a marriage breakdown and was struggling to support her 5 children. Bill wanted to help his niece and thought her land near Mt Tambourine would be a good expansion opportunity for MYM so he approached the board with the suggestion they purchase her land. Bill did not disclose that the vendor was his niece. Although Bill hadn’t done any due diligence his informed the board he had researched the land and believed it was perfect for their next retreat. Bill knew that $2 million would pay off all his niece’s debts and be enough money for her educate and care for the children so he suggested MYM pay $2 million for the land. Bill didn’t research the market where the land was located but $2 million was the amount paid for the land of the last site the company acquired. As Bill was the oldest and most experienced director. Amy and Paul looked up to him and trusted him implicitly. They both voted in favour of the purchase and in April 2018 MYM signed a contract to purchase the land. Bill instructed the lawyer engaged to transfer the property on behalf of MYM not to do any of the usual searches. Bill assumed his niece would have informed him of any significant matters and not doing the searches saved MYM $550 in search fees. In June 2018, after the land purchase was complete, MYM engaged Building Works Pty Ltd to draw up architectural plans, conduct soil testing, and get building plans certified. Building Works Pty Ltd has issued MYM with an invoice for $45,000 for the work completed.

On 1 July 2018 MYM received a letter from the Queensland Government about 600m2 of the land which it was resuming to put in a major highway. Although the remaining land would be large enough for the development planned by MYM, a highway in that location makes the land unsuitable for a upmarket retreat business. Had the Queensland Transport and Main Roads search been completed MYM would have been aware that a portion of land was being resumed by the government and could have terminated the purchase contract. Realising the land could not be used MYM as intended, Amy immediately appointed a real estate agent (“Homes Pty Ltd”) to sell the land. The agent informed Amy that due to the freeway the land would probably sell for around $800,000. Fearing suppliers might stop trading with the company when they hear about the amount of money the company would lose on the land transaction Amy quickly ordered extra product from all suppliers and 6 massage beds. Amy believed that if the current facilities increased their services the Company may be able to trade out of its financial difficulties. On 30 July 2018 a liquidator was appointed. The liquidator cancelled the contract with Homes Pty Ltd and appointed a company with more sales experience in the area.

We have been advised of the following additional information: • The shareholders are seeking compensation for breach of directors’ duties. • Building Works Pty Ltd’s invoice has not been paid. • Massage Plus Pty Ltd, the supplier of the massage beds, is currently owed $30,000 for the 6 massage beds ordered by the company. • Homes Pty Ltd is owed $3,000 in marking expenses for the land.

In relation to the claims made by shareholders, have any of the directors breached the directors’ duties under section 180 of the Corporations Act 2001 (Cth)? In considering this, also address any potential liability the directors may face.

Answer 1

PROVISION:180 Care and diligence—civil obligation only

Care and diligence—directors and other officers

             (1) A director or other officer of a corporation must exercise their powers and discharge their duties with the degree of care and diligence that a reasonable person would exercise if they: (a) were a director or officer of a corporation in the corporation’s circumstances; and

(b) occupied the office held by, and had the same responsibilities within the corporation as, the director or officer.

Note:          This subsection is a civil penalty provision (see section 1317E).

Business judgment rule

             (2) A director or other officer of a corporation who makes a business judgment is taken to meet the requirements of subsection (1), and their equivalent duties at common law and in equity, in respect of the judgment if they:

                     (a) make the judgment in good faith for a proper purpose; and

                     (b) do not have a material personal interest in the subject matter of the judgment;

                     (c) inform themselves about the subject matter of the judgment to the extent they reasonably believe to be appropriate; and

                     (d) rationally believe that the judgment is in the best interests of the corporation.

The director’s or officer’s belief that the judgment is in the best interests of the corporation is a rational one unless the belief is one that no reasonable person in their position would hold.

Sec :191 Material personal interest—director’s duty to disclose

CONCLUSION:

Bill did not disclose that the vendor was his niece. Although Bill hadn’t done any due diligence his informed the board he had researched the land and believed it was perfect for their next retreat.- and  Bill assumed his niece would have informed him of any significant matters and not doing the searches saved MYM $550 in search fees.This is treated asMaterial personal interest u/s 191 as all the material facts are not disclosed,and due diligence and care not taken for u/s 180 leads to breach of directors duty .

Hence Bill has breached the directors’ duties under section 180 of the Corporations Act 2001 (Cth)

There fore BIll face potential liability in the following areas:

• negligence claims
• disclosure claims
• breach of duties on which shareholders could take action against the company's directors.