Irac answers

Ky, Zi and Zahlia were all directors of a large public company, MINDZ Ltd. Ky was the managing director, Zi was the finance director, and Zahlia was a non-executive director. The board approved a $1 million loan to be granted to PSYCHO Ltd, without obtaining security for the loan and without ensuring that MINDZ Ltd's normal investment committee approval process was followed.Also, Ky had not ensured safeguards and controls were in place to cater for the potential conflicts of interest in MINDZ Ltd considering a loan to a company controlled by one of MINDZ Ltd's own directors. The borrower, PSYCHO Ltd, was in fact controlled by Zi and the loan money was used to fund Zi's gambling activities.

The unusual circumstances and nature of the unsecured $1million loan by PSYCHO Ltd to MINDZ Ltd was reported to the ASIC. ASIC argued that Kyrie has breached her duty of care towards the company. On the other hand, Zi had breached his statutory duties of good faith and to not act for an improper purpose.

Do you agree with ASIC and would the business judgment rule defence under s 180(2) apply here?

ASIC also found MINDZ Ltd. was severely in arrears with several loans it had with its creditors when it approved the $1million interest-free loan. The government body later accused the board for breach of insolvent trading rules under s 588G. Zahlia argued she should not be accused as she did not actively participate in the management of the company due to her non-executive role. Zahlia had no knowledge about any of the loans the company owes because she left all company decision making to Ky and Zi! When asked if she made attempts to keep up to date with company affairs, she stated "Yeah I read Ky's Twitter account where she posts company gossip. Isn't that enough?"

She feels she is being unfairly accused and has sought your advise.

Is Zahlia correct? Discuss and explain whether any relevant defences that may apply to her situation.