David is the CEO of Gold Star Ltd ("GSL"), an Australian company which designs and manufactures prestige kitchen appliances. There are three other directors: Sammy, the Chief Financial Officer; Karen the Design Director; and Peter who is a non-executive director. The three executive directors (David, Sammy, and Karen) each hold 15% of the shares, totalling 45% of the GSL's ownership between them.

The company constitution contains the following select clauses:

23. All shareholders shall be entitled to receive a dividend on all classes of shares held. The amount and date of the dividend shall be determined by the board of directors.

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31. The directors must not enter into any loans or mortgages that are valued at or over $AUD 500,000 without the prior approval of the shareholders.

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37. The signature of three executive directors is required to bind the company in contract.

The business has suffered from cheap foreign competition. Many goods on the market closely resemble the design and function of GSL products, resulting in a recent legal battle costing millions with a company called 'Kitchen Buddy'. As a result, GSL has only made $700,000 in profit in the last financial year - down from $20 million in 2019.

Sammy has been working to cut costs and has found a cheaper supplier of goods called Spare Parts Pty Ltd ("Spare Parts"). It was in fact Peter who was insistent that Sammy consider Spare Parts as an alternative and more affordable supplier. At a meeting between Sammy and Donald (one of the directors of Spare Parts), a deal is offered to Sammy which would save GSL $250,000 annually over four years. Sammy explains that he will need to put this offer to the other directors of GSL at the next monthly board meeting in October.

Karen has been unhappy in her role and wants the company to produce more affordable items. She has interviewed with Kitchen Buddy for the role of CEO and, to showcase her cutting-edge design, has disclosed to Kitchen Buddy her top-secret GSL designs that are yet to be released. She is yet to hear if she is successful but Kitchen Buddy have invited her to a second meeting to discuss GSL's operations and strategy in more detail.

At the board of directors meeting in October, the following items are discussed:

All of the directors except Peter are present at the meeting. Peter was unable to attend due to illness and has asked that Karen vote on his behalf. He sends a medical certificate to all of the directors with a short one word email saying "sorry". This is the third meeting in a row that Peter has missed. Not to mention, he has not read the board papers for months because he has been distracted setting up a new side-business. The three executive directors (David, Sammy, and Karen) are present at the meeting.

Sammy presents the Spare Parts business deal to the board. All of the directors present at the meeting vote in favour of the offer.

David proposes to deliver a dividend to the shareholders, which will cost the company $AUD 1.5 million. Sammy explains that the company is low on cash and would need to borrow from the bank to make the dividend payment. He tells the other directors that they should not pay out a dividend this year given GSL's precarious financial position.

David and Karen both agree that David should discuss taking out a loan with GSL's bank manager, Marty, who has dealt with the company for years. Sammy disagrees with this plan of action.

Immediately following the meeting:

Sammy signs a four-year agreement with Spare Parts. Unknown to Sammy and the other directors of GSL, Spare Parts is actually owned by Peter's half-brother, Donald. It is later discovered that Peter had loaned $150,000 to Donald to help him set-up Spare Parts.

David discusses the $AUD 1.5 million loan with his good friend Marty, the bank manager. Marty is aware of the company rules and wants to help David. He agrees to the loan, which is secured against all the machinery in GSL's factory. David signs the contract with the bank, explaining that he will seek shareholder approval later.

The next day, David informs the shareholders that there will be a $1.5 million dividend payout on 31 December 2020.

The following occurs at the November AGM:

The shareholders vote down the proposal to borrow from the bank.

The shareholders express concern at the declaration of dividends.

The shareholders ratify the contract with Spare Parts.

In early December, Sammy receives a final notice from a previous supplier who is owed $250,000. Sammy immediately pays the invoice in full out of fear that the supplier will take further action. On 12 December, David decides to buy a gold-plated Christmas tree to decorate his office. David pays $35,000 for the tree out of the company's account. The other directors are annoyed with the extravagant purchase, and after some investigation, discover that the tree is fake and is only worth $1,000.

REQUIRED:

a)Explain whether the directors are obligated to pay out a dividend to their ordinary shareholders?

b)Explain whether GSL is bound by the loan agreement with the bank?

c)Advise the shareholders of GSL about the best available actions and remedies that can be taken by them.

d)Explain whether any directors have breached their duties, and whether any valid defences apply. Include reference to any applicable penalties.

e)Explain what the likely consequences may be if GSL enters external administration. Would a liquidator identify any transactions which can be clawed back?