Henry is a non-executive director of So-high Adventure Ltd, a company that caters for hot air balloon rides for tourists. The other directors are Mike, the managing director and Ping, the associate director. The three directors of So-high Adventure Ltd hold a board meeting and pass a resolution that the company should borrow money to buy a hot air balloon that can accommodate 4 people. Further investigation reveals that Henry had been busy preparing for his boat race which is entered to run in the forthcoming Sydney to Hobart yacht race and therefore Henry did not read the financial analyst's report provided to the directors on this transaction. The report's recommendation was to delay the decision until further research could be conducted.

Henry then went on annual leave. Whilst Henry was on leave, the other directors decided at a board meeting to purchase a balloon that accommodates 20 people. They had misread the financial analyst's report and assumed that further research was recommended due to the safety record of the 4-person balloon. On his return Henry was shocked to find that the company was unable to make the first interest payment to the bank. This was because the other two directors had borrowed $1 million and purchased a balloon that could accommodate 20 people.

Henry does not believe that he has done anything wrong, claiming that he was not negligent in his conduct as he had not taken part in the decision to borrow the money to buy the 20-person balloon.

NOTE: You are required to use the 4-steps process in answering this question. The marks allocated for the steps are as follows:

Steps 1 and 2: 10 Marks.

Steps 3 and 4: 10 Marks.

[20 Marks]