Question

Claire Ltd is a company that specialises in selling high-end luxury designer apparel for women. May and June are two directors of the company. May has extensive knowledge about fashion as she has done a degree in fashion designing. June is specialist in the accounting side of the company as she has done a bachelor degree in Accounting. One day May has a fabulous idea to expand the company into the children’s apparel market. May wanted to make children’s clothes more fashionable and daring. May without consulting June, went and got a $5 million in loan and started to design the children’s apparel.

May sent her designs to production and soon started selling the clothes at various outlets. After a while, May realised that the new designs were not doing so well. There was little sales and consequently, there was little profit. Claire Ltd started losing money and was not able to pay the debts of the loan. June was very unhappy when she realised what was going on. May then used the loan to invest money in a risky venture and retained all the profits from it for herself. Claire Ltd has become insolvent.

Advise whether May has breached any of the duties of the directors. What remedies are available, refer to authority and relevant cases.

Claire Ltd is a company that specialises in selling high-end luxury designer apparel for women. May and June are two directors of the company. May has extensive knowledge about fashion as she has done a degree in fashion designing. June is specialist in the accounting side of the company as she has done a bachelor degree in Accounting. One day May has a fabulous idea to expand the company into the children’s apparel market. May wanted to make children’s clothes more fashionable and daring. May without consulting June, went and got a $5 million in loan and started to design the children’s apparel.

May sent her designs to production and soon started selling the clothes at various outlets. After a while, May realised that the new designs were not doing so well. There was little sales and consequently, there was little profit. Claire Ltd started losing money and was not able to pay the debts of the loan. June was very unhappy when she realised what was going on. May then used the loan to invest money in a risky venture and retained all the profits from it for herself. Claire Ltd has become insolvent.

Advise whether May has breached any of the duties of the directors. What remedies are available, refer to authority and relevant cases.

Answer 1

Ans: Yes May has breached the duty as a director as he didn't consult with June to expand the company into the children's apparel market and got $5 million in loan.

Remedy available to company:

If there is a breach of director duties, it is usually the company itself which takes action. In some instances, one or more shareholders can make a claim against a director if they have suffered personal financial loss or damage, or they believe that other directors may prevent a claim being made by the company.

Consequences of breach can include:

• Removal from office - if more than half of the shareholders vote in favour, the director can be removed from office, either temporarily or on a permanent basis.
• Restoration company property.
• Setting aside transactions
• An interim injection- to prevent any further loss or damage due to a breach of director only.
• Damages or compensation for financial losses incurred - in serious cases this can result in being pursued through the courts, loss of your home, and ultimate bankruptcy.
• Criminal fines.