Company law - A problem-solving case scenario

Nam, Kim, and Tong are the directors and shareholders of NKT Pty Ltd (NKT), once was a successful multimedia and marketing company. NKT also has two other members, Jay and Mony. With the downturn in economic conditions, the board decides that the company should change its business direction to a new product range which is predicted to be more profitable. They resolve to explore the opportunities to grow their business to health food products. Without informing the shareholders, the board determines to change the company's direction from multimedia and marketing to health food products. The board decides to borrow $500,000 from the DomDuk Bank.

Due to this decision, NKT's shares fall dramatically, and now the company is struggling to pay its bills. The creditors send constant reminders to NKT about the unpaid dues and are threatening to take a court action if their invoices are not paid on time.

Jay and Mony believe that board's decision from multimedia and marketing to health food products is not sound and need explanation.

The board resolves to sell off some of the company's assets to take over another marketing business GrowGlow Ltd with a hope that NKT and GrowGlow's merger would boost the company's financial position. Kim, Tong, Jay and Mony do not know that Nam's sister Anna is the major shareholder and director of GrowGlow. The fact of the takeover decision is not known to anyone else except the board. Nam informs his accountant Congqi about NKT's decision to take over GrowGlow Ltd who buys 100,000 shares in NKT at the value of $10 per share. Nam, Kim, and Tong also increase their own shareholding with each buying $200,000 in NKT.

As the company is still struggling financially, Nam and Anna sell their shares in the NKT and go into the share broking business.

Subsequently, NKT becomes insolvent. Jay and Mony believe that the board has been irresponsible in decision making for NKT. The company also wishes to seek remedies and demands an explanation for Nam and Anna's decision to leave the company.

REQUIRED:

Describe the directors' duties that are relevant to these facts. Include the provisions ofCorporations Act 2001 (Cth) and case law in answer. In your answer, you may consider:

1. Who has the power to make management decisions for the company? Discuss the respective roles of the members and management in a company.
2. Have Nam and Anna acted improperly in fulfilling their duties as directors? Discuss directors' duties under ss. 180-183. Refer to the 'insider trading' provisions of the Corporations Act 2001 (Cth)
3. What are the possible consequences of their conduct?
4. Can the 'business judgment rule' (BJR) be relevant in these circumstances? How may BJR be used as defence by the directors of NKT?

What are the possible defences for a director accused of breaching insolvent trading provisions of the Corporations Act 2001 (Cth)?