Millie and Ashleigh are shareholders in Interior Living Design Pty Ltd (“ILD”). They were elected as directors in April 2017. ILD was registered at ASIC in 2004 and has retained the replaceable rules. It is an artistic interior design and furnishings company with a loyal clientele. However, high costs in importing fabrics and furniture from overseas has resulted in ILD experiencing a difficult financial period. Shareholders voted for Millie and Ashleigh because they promised to create stability in the company to avoid it suffering financial loss in the future as an economic downturn in the industry was expected. Millie was a director in a different company but that company went into liquidation. There are 4 other directors (making 6 directors in total) and a total of 20 shareholders. Millie and Ashleigh are the only directors with tertiary qualifications. Nicole, one of the other directors, has very little education and left school at 15.

In late December 2017, Millie is in the Sydney CBD and sees a “For Lease” sign on Coco-Central, a ‘cheap eats’ restaurant near Central Railway where she used to meet with friends in her student days. She has great memories of her fun times at Coco-Central and immediately decides that this should be where ILD’s office should be. Millie believes that converting the restaurant into a front office and reception, with a design studio and storage space at the rear will be an easy transition. The company’s present premises are in an industrial area near Castle Hill, 32 km from the centre of the Sydney CBD, and the current lease has 6 months to run (6 months left). The restaurant near Central Railway is located near wholesale fabric manufacturers and provides easy access for clients. The restaurant space is presently too big for the company’s present needs and the rental is much higher than at the company’s current location but Millie thinks the move will ultimately lower costs and provide the potential for an increase in clientele.

Millie is a little hesitant about moving the company’s offices. She telephones Nicole and asks her to convene a directors’ meeting for later in the week to discuss the lease. Nicole explains that it may be difficult to get the other directors together at such short notice over the Christmas break and tells Millie to have confidence in herself. Millie is in fact unsure about Nicole’s understanding of the lease arrangement but appreciates her support.

On the same afternoon that she sees the restaurant and, after she has called Nicole, Millie contacts the owners of the restaurant premises and expresses her interest in leasing it for ILD. The owner says that there is another interested party who is also in the interior design business and that if she wants the premises she must act immediately. The owner informs Millie that the lease must be for an initial period of 3 years. She feels she is being rushed but agrees and accordingly signs the lease on behalf of ILD before she has been able to raise the matter at the directors meeting.

ABC Bank has provided a number of loans to ILD in the past and, at present, ILD only has a small overdraft with the bank. Over the past three years, Millie has had a number of dealings with the bank on ILD’s behalf and so organised a loan of $300,000 with ANZ Bank to finance the move to the new premises and purchase of office equipment. ABC Bank then sought a guarantee from ILD in relation to the loan. The guarantee (together with associated acknowledgements) was purportedly executed by ILD, by Millie as director and Ashleigh, as another ILD director. Ashleigh’s signature was forged by Millie. ABC Bank followed up by sending letters of offer to Millie to vary the existing banking arrangement with ILD. Among other things, those letters of offer enclosed acknowledgements to be signed by the company. The acknowledgements were signed by Millie and also had Ashleigh’s forged signature. Millie returned them to the ABC Bank, purporting to act on ILD's behalf.

Ashleigh hears of the lease arrangement early in January 2018. She believes that Millie has led the company into a bad deal and that she is “too creative.” Nicole does not agree with Ashleigh but the other directors do. Accordingly, ILD refuses to enter into possession of the restaurant premises and rejects the lease. The owner of the premises wants the lease enforced and threatens to sue. ILD already has several outstanding creditors and these debts, together with the claim by the owner, could easily result in the company’s liquidation.

ABC Bank is now also threatening to sue on the guarantee.

Consider the above fact situation and explain whether Millie has breached her duty of care and diligence. What are the relevant consequences if she has? Is ILD bound by the loan with ABC Bank? (40 lines maximum)

Answer rating: 100% (QA)

SOLUTION Before we know about the breach of contract firstly consider the following which explains u... View the full answer