Question

Travel Australia Pty Ltd is a company that provides elite travel experiences in Australia.  Top 4wd Pty Ltd has three directors: John, Chris and Michelle.  John has been appointed the managing director.  Michelle is appointed as an independent non-executive director.  Chris is a qualified chartered accountant, and the board refers to him for his accountancy skills.  The company maintained a good profit for the first three years of operation but has recently experienced an increase in cost, causing some financial strains on the company.

Despite the decline in the company’s financial position, the board believe that they should expand into providing motel accommodation.  The board delegates to Chris the task of investigating the financial returns on a proposed motel project.

Chris delegates the task to his secretary as he is about to go on holidays.  The report (prepared by the secretary) recommends the project.  It later turns out the report is misleading as it has missed a number of costs involved in the new project. At the board meeting the directors are in a hurry to get through a number of items and the proposal is considered as the last item on the Agenda.  The directors spend less than five minutes discussing the report and agree to accept the proposal.  During the Board meeting Chris notes the company is struggling to pays its debts as they fall due.  Michelle was not at the meeting and has missed several meetings lately as she has been committed to other ventures.    

Three months later the company is placed into liquidation by one of its Creditors.

Advise the Liquidator on the following:

a)      Have any of directors breached the Duty of Care contained in Sec 180 of the Corporations Act? Discuss with reference to cases and also consider any defences which maybe available to them.         

b)      Consider when the directors maybe liable for any debts occurred in relation to the projects as a result of the financial position of the company at the time of the Board meeting.   

Answer 1

A)

According to corporation Act 2001 Sec-180, Care and diligence

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:

were a director or officer of a corporation in the corporation's circumstances; and occupied the office held by, and had the same responsibilities within the corporation as, the director or officer.

In the case of Travel Australia Pty LTD, the Board appointed Chris as a director for his accountancy skill. The board delegates to Chris the task of investigating the financial returns on a proposed motel project but he breached the duty of Care contained in Sec.180 and did not discharged his responsibility in a proper manner and put the Company into difficult situation. So he is responsible as per above mentioned Section of Corporation Act for not discharging his duties with care and diligence and it is a civil obligation.

As a defence Chris can argue that the Board was also responsible as they discussed the proposal in a hurry and approved without considering all aspect of the new project and non executive director Michelle was not attending the board meeting regularly.

B)

Business Judgement means any decision to take or not take action in respect of a matter relevant to the business operations of the corporation.

If the director have a material personal interest in the subject matter of the judgment; the directors are liable for any debts occurred in relation to the projects as a result of the financial position of the company at the time of the Board meeting. Use of Information for personal gain considered as a civil offence.

If the Judgement is taken in good faith for a proper purpose; and do not have a material personal interest in the subject matter of the judgment and rationally believe that the judgment is in the best interests of the corporation and situation changed the company incurred loss the directors are not liable.