In July 2019, the directors meet and resolve to approve the company's budget for the next financial year. The minutes of the previous meeting show that the directors have approved to build two new super stores- costing approximately $10 million over the next financial year. However, this cost is not reflected in the company's accounts. Ryan and Geraldine did not properly read the budget because they trusted Sally's expertise. To date, the omission has not been corrected and the company's shareholders are complaining that the $10 million hole in the budget was misleading and is likely to affect the company's credit rating - leading to higher borrowing costs than anticipated.

In September 2019, Ryan renews a five year contract between Paws and a major pet food brand. The average item prices are increasing by 10% - but Paws will still make a large profit on the sale of these popular items. Ryan received two free tickets to the AFL Grand Final in a corporate suite and accommodation in a luxury room at the Grand Jolimont Hotel worth a total of $3,000 - hosted by the pet food brand. Ryan doesn't disclose this to the other directors as he is personal friends with one of the pet food company's directors.

In October 2019, Joey (social media manager at Paws) notices a number of negative reviews online of Au Naturale - a boutique brand of organic pet treats that are sold in the company's stores. Specifically, the comments relate to customers opening the packets to find that the treats were moldy. Joey raises this with Geraldine. Geraldine directly called the founder of Au Naturale who assures her that everything is fine, explaining that their products do not contain preservatives and that these customers simply must have left the packets open for too long. Geraldine considered that this was a reasonable explanation and did not take the matter any further. Geraldine also knew that the products are certified organic quality. However, Geraldine did not realise that Au Naturale's products were the subject of a critical news report on Channel 4's "NewsNight" program which had exposed poor hygiene practices in Au Naturale's Sunbury factory. Ryan continued to order a one month supply of Au Naturale products in advance (the company's usual practice). Later that month, Au Naturale issued a recall notice for all of its product lines because of toxic mold contamination in its products. Au Naturale also went into voluntary administration due to insolvency, meaning that it will be very unlikely to pay refunds. Paws' inventory stock of Au Naturale products in its Super Stores was valued at $135,000 and had to be discarded. But several customers have already purchased an Au Naturale product over the last month and store managers are reporting customer's complaining that the products have made their dogs sick and demanded refunds. Joey notices that several customers are posting negative reviews on Paws' social media pages. Following these events, a group of disgruntled shareholders have complained to ASIC. [ComLawDept: 7144852] Internal Memorandum - Not For Distribution Flinders Partners Consultants and Corporate Advisors

REQUIRED QUESTIONS: 1. Advise the Senior Partner whether there is any merit to ASIC bringing any action against any or all the directors for a breach of their statutory duties as directors of Paws Ltd. (Note: consider only statutory duties, but you should refer to case law as relevant) (25 marks)

2. If ASIC are successful in bringing an action, outline the potential penalties or remedies that a court could impose against the directors. (5 marks)

3. If the directors still want to list the company on the stock exchange, then the ASX Corporate Governance Recommendations suggest that a majority of the directors should be independent and that there should be an independent chair.

(i) What is the reasoning behind these recommendations? (5 marks)

(ii) How could Paws Ltd comply with these recommendations prior to listing? Explain any processes involved. (5 marks)

(TOTAL: 40 MARKS)