Arjun, Delmar and Ferne are the directors of Aloha Pty Ltd. Arjun is the managing director, and

Ferne was formerly a banker with an international investment banking firm. Aloha borrowed $10 million from Saskia, a friend of the directors who has extensive financial knowledge, and in return gave her a debenture which was secured on certain assets owned by the company. Aloha's largest shareholder is Nick, who owns 35 per cent of the shares.

Aloha has recently been experiencing financial difficulty. Its bank account is constantly in overdraft, its bank has refused to extend further funds, creditors are calling for payment and many of its suppliers are insisting on cash on delivery. The company is in need of additional funding.

At a board meeting, Arjun and Ferne ask if Delmar would be willing to try to find an investor willing to invest in Aloha. Delmar accepts even though she is a little hesitant to take on this task she knows nothing about finance and has been tired and distant lately due to the painkillers she is taking for injuries sustained in a car accident while she was on vacation in Bali. Apart from the injuries, the accident has shaken Delmar because she was charged and convicted of an offence of reckless driving, which can carry up to a 10-year jail sentence in Indonesia. Luckily, she was fined only $500.

A hedge fund called Green Sky Pty Ltd approaches Delmar and offers to lend Aloha $1 million provided that Aloha gives it a security interest in all the assets which are not encumbered by Saskia's security interest. Green Sky's finance agreement includes very strict financial covenants, and Aloha would pay an interest rate of 25 per cent.

Delmar approaches Saskia and asks if she would be interested in providing further money on the same terms as Green Sky. Saskia says she wouldn't, but tells Delmar that she thinks the Green Sky deal represents good value. Delmar then proceeds to negotiate the finance agreement with Green Sky.

Delmar presents the finance agreement to the other two directors at a board meeting. There is some discussion at the meeting about the terms of the finance agreement before the directors agree they will sign it.

The terms of the finance agreement are oppressively restrictive and Aloha is unable to make any profit. Ultimately, Green Sky appoints receivers, who sell the assets that were subject to Green Sky's security interests. Aloha has suffered enormous losses as a result of this.

Nick is furious, as he has lost a lot of money and blames it on the directors' incompetence. Indeed, he doesn't even think that Delmar should have been a director.

(a) Is Nick correct about Delmar?

(b) Advise Nick how he should proceed in bringing an action against the directors for breaches of

their duties to the company. Make sure to discuss which duty (or duties) would form the basis for

such an action.