Question

Steve, the Managing Director of Landscape Leaders Pty Ltd (“Landscape”) accepts a bulk

order for landscaping materials from Gotcha Gardens Pty Ltd (“Gotcha”). The landscaping

materials are delivered to Gotcha, who fail to pay for the materials. Gotcha had a history of

failing to pay their invoices on time and a bad credit score and Steve was aware of this. Due

to increasing financial difficulties, Gotcha goes into liquidation, without ever paying

Landscape for the materials.

Meanwhile, Steve had also made plans to expand Landscape interstate. He borrowed

$150,000 from Net Bank on behalf of the company, but these plans had not been disclosed

to Landscape’s shareholders. At the point of obtaining the loan, Net Bank advised Steve to

keep track of the company’s financial position, as Landscape had made a loss over the last

two quarters of the financial year. In fact, Landscape’s cash reserves are so low that they will

not even be able to make the first payment on the new loan.

Advise Landscape Leaders Pty Ltd whether Steve would be personally liable for

Gotcha’s unpaid debt and for repayment of Landscape’s $150,000 loan to Net Bank. In

your answer refer only to the statutory duties under the Corporations Act 2001 (Cth)

and the supporting common law.

(You are NOT required to discuss any defences or remedies).

Answer 1

Directors of a company must exercise their powers and use them for well being of the business and in the best interest of the corporation, law says . A test named ' quasi-objective test is required to ask whether an honest , reasonable and deserving person is in the position of the director of the company concerned . A subjective test is also applied following this to determine the honesty of the director in carrying out his or her fiduciary duties , for the best interest of the corporation including the interests of both existing and future shareholders. A director is required to exercise his or her powers for proper purposes and act with due care and dilignece, if the director fails in performing these duties it will result in a declaration of contravention made with the Australian Securities and Investment Commission (“ASIC”) seeking a pecuniary penalty order, an injunction or can be disqualified .

Steve didn't informed his sharehholders about the loan he borrowed which is not allowed . To manage the conflict between directors and shareholders the govt. says shareholders must be informed about such things .

But in no sense Steve would be personally liable for Gotcha’s unpaid debt and for repayment of Landscape’s $150,000 loan to Net Bank as law says you are not personally liable for paying the company's debts in any case only the company assests can be used to pay the debts of the company. This means that if the limited company does not pay its debts and a creditor takes court action, only the company assets are at risk.

Let me know if you need any further information i will edit the answer according to your need .:)