Julian, Tom and Bev have now all been appointed as directors of Retrofit Pty Ltd. Jessica will be appointed as an alternate director to the company to replace Bev for 6 months while she is on holidays. Jessica has a strong background in tax, corporate and finance law but knows little about the recycling industry. Julian and Bev hold quarterly meetings to discuss the management accounts, budgets and planning issues for the company. (Tom never attends as he is too busy running the office and sorting out issues with customers and suppliers. Tom understands budgeting and deals with daytoday handling of office expenses but feels the issues of the corporate budget and the company accounts are beyond his skill level and are better left in the hands of the others.) In your discussions with Julian, you find out the following about the other officers. Bev, as a retired accountant, has financial skills but knows nothing about waste recycling. She is also not entirely up to date with current tax and accounting laws and is not familiar with MYOB or QuickBooks. Tom knows all about waste recycling and dealing with suppliers, has an interest in speed boats but knows little about finance and relies on Julian and Bev to deal with the financial aspects of the company.

Julian is the brains of the business and, like Tom, has a basic understanding of finance but prefers to leave all things relating to company accounting and finance to Bev. Julian's strength is marketing and talking to people. Remember, he does not really understand the difference between the profit of the business and the cash in the bank. You have also been talking to Tom and Bev as part of your dealings with Retrofit Pty Ltd. During your discussions, in addition to the above, you find out the following. Julian has told Bev that he and Tom are reliant on her for financial matters. Tom delegates the responsibility of maintaining office equipment and supplies to Michelle. Andy is responsible for keeping the warehouse safe. Between them, Tom and Julian purchase the waste materials for recycling. Tom received from one major waste collector, free tickets to the football grand final plus a trip to Cairns for his family. Tom and Andy would both like to run their own businesses. You suspect that Tom has been sounding out the customers. Andy allows Tom to take recycled parts home to do up his speedboat. Andy says that the items that Tom takes have been scrapped. The estimated value of those items is about $8,000. While there are reasonable margins on sales, the business relies on highvolume turnover. Competition is tough as the cost of recycling is cheaper overseas. The business suffers cash flow problems from time to time, particularly as four major customers are slow paying. You have reviewed the monthly cash flow statements prepared by Bev and note that in some months there is insufficient cash to pay the creditors and staff. In those months, Julian has had to tip in some of his own funds. Noone in the business appears to understand the tight cash flow conditions. You know from discussions with Julian that Retrofit Pty Ltd has been threatened with insolvency on two occasions for failure to pay its suppliers. On each occasion Julian, with Jessica's help, has negotiated payment terms on behalf of the company. The monthly cash flow schedules indicate that it is becoming difficult for the company to maintain the repayment schedules on the overdraft and pay suppliers and staff. One major supplier of motor parts is now demanding the immediate repayment of an outstanding debt of $68,000. Another supplier will only deliver on terms of cash on delivery. You note that there is only $45, 000 in the bank today. Debtors owe the company $119, 000 but the cash will not come in for another 20 days. Julian estimates that only 90% of the $119,000 will be paid. You advise Julian and Bev that the company is undercapitalised and needs more funds. You suggest that to avoid this problem in the future, the company should either issue more shares or get a further loan from the

bank. Julian is interested in issuing more shares because his wife's family in India might be prepared to invest. He is concerned that Tom and Bev may be trying to take control of the company but he needs them in the company. Julian wants to retain control of the company, so he is only prepared to issue the shares if he can keep control. Andy is disappointed that he was not made a director and is thinking of setting up his own business, with or without Tom, in a couple of years' time. Andy has a good relationship with some of the key clients of the company. Julian may therefore make him a director to prevent him leaving. Issues You and Julian discuss that it is important that all the officers understand their duties and responsibilities. Julian asks you to prepare a paper detailing the following issues for all the officers. What are the duties and obligations of a company officer? What liability do company officers have for the actions of the other officers? What are the consequences of breaching duties? Julian rings you on Monday afternoon at 4.30 pm wanting to see you and Jessica urgently. Bev is away on her holiday. Julian tells you the following. Andy was unhappy about not being appointed as a director. He said his past failings were not his fault it was the accountant's fault. Julian knew something was wrong when customers that he expected would continue buying recycled material from Retrofit Pty Ltd cancelled their existing contracts or said they did not want to renew their contracts. The customers told Julian they had found a cheaper company to supply their costumes. Julian asked the excustomers for the name of the company they were going to; it was called Power Parts Pty Ltd. Julian asks you to find out about Power Parts Pty Ltd. You do a company search on the ASIC website and find out that the company is operated and owned by Andy and his boyfriend, who happens to be Tom's cousin. Julian now thinks he understands why Andy has been staying late at night in the warehouse. The Retrofit computer system is easily accessible from the warehouse as well as the office. Julian surmises that Andy was probably accessing financial and customer details from the company files. Julian estimates that the company has lost four major clients and the profit on these four clients was about $225,000. Julian, understandably, wants to fire Andy and possibly Tom, but not before Retrofit Pty Ltd gets back the lost profits and customers if possible.

Tom is also causing Julian problems. His attention to detail is slipping and he seems to be making more mistakes, which has also led to some customers going elsewhere. Julian finds out from Michelle that Tom is getting free trips and gifts from a particular recycling waste supplier. Before she went on leave, Bev did an analysis for Julian of the materials ordered by Tom, listing their cost, and it shows that the prices the company is paying to the suppliers is about $2 to $5 higher than the other suppliers. The quality of the goods is the same from each supplier. Tom has never told Julian or the other officers about this or of the benefits that he and his family received. Julian also notices that Tom is wearing more expensive outfits than he used to, and wonders if Tom is taking recycled clothes from the warehouse for free. If Julian can prove this, can he get Tom to pay the money back? Julian is upset by all of this and, with Bev being away, he is reliant on you for assistance and advice. He wants to know what he and the company can do to take action against Tom and Andy. He also wants to know whether he should report them to ASIC. Jessica wants you to prepare a report for Julian, responding to all of the noted issues. You will need to consider the actions of the officers and employees of Retrofit Pty Ltd. Did any of them breach the duty of care and diligence? Can any of them use the defence of the business judgment rule? Hint: List what each person did (Julian, Bev, Jessica, Tom and Andy). Look at their knowledge or lack of knowledge and see if they are the actions of a reasonable officer. Note that their actions are likely to have breached duties related to conflict of interest and being a fiduciary. You will add these issues to your report on directors' and officers' duties. You are nearing the end of a very long meeting with Julian. He has had much to say. Retrofit Pty Ltd has undergone great upheaval recently . Tom has been receiving kickbacks from one supplier, but this has been at the cost of higher prices to the company. Tom has been downloading customer data from the business computer network and taking it home. Andy has allowed Tom to take $8,000 worth of parts home for his speedboat, telling Julian the parts were scrapped. It is becoming difficult to maintain the repayment schedules on the overdraft and pay suppliers and staff. The company has been experiencing cash flow problems. In some months, Julian has had to pay wages from his personal bank account. The company has been threatened with insolvency multiple times due to failure to pay for supplies. Retrofit Pty Ltd has lost sales to important customers who have moved to Power Parts Pty Ltd, operated by Andy and Tom's cousin. Issues

During the meeting, Julian has several questions relating to important issues surrounding the future of his business. The issues arising include the following. Does the company have grounds to take action against Tom and Andy? What action could Julian or the company take? What could Julian have done to avoid the problems currently facing Retrofit Pty Ltd? ISSUES TO BE DISCUSSED 1. Consider the business affairs of Retrofit Pty Ltd and skills and roles of the various officers. Also consider the need to understand the financial accounts of the company Required: Who does these obligations apply to? What if they do not do so? Can they rely on others? 2. Consider the roles of Julian, Tom, Andy, Bev and Jessica in Retrofit Pty Ltd. As officers of the company, have they met their duties in relation to the standard of care? Has: Julian? Tom? Andy? Bev? Jessica? Required: What potential breaches do you think they have done if at all? 3. Julian rings you on Monday afternoon at 4.30 pm wanting to see you and Jessica urgently. Bev is away on her holiday. Julian tells you the following. Andy was unhappy about not being appointed as a director. He said his past failings were not his fault it was the accountant's fault. Julian knew something was wrong when customers that he expected would continue buying clothing as costumes for theatre, film, and television productions from Retrofit Pty Ltd cancelled their existing contracts or said they did not want to renew their contracts. The customers told Julian they had found a cheaper company to supply their costumes.

Julian asked the excustomers for the name of the company they were going to; it was called Flower Power Suits Pty Ltd. Required: What obligations at law has Andy breached? What can Andy do? 4. Julian finds out from Michelle that Tom is getting free trips and gifts from a particular clothing supplier. Before she went on leave, Bev did an analysis for Julian of the clothing ordered by Tom, listing their costs, and it shows that the prices the company is paying to the suppliers is about $2 to $5 higher than the other suppliers. The quality of the goods is the same from each supplier. Tom has never told Julian or the other officers about this or of the benefits that he and his family received. Required: What obligations to the company has Tom breached? Does he have a defence? 5. Retrofit Pty Ltd's business is experiencing an economic downturn. During this time, Julian has taken the opportunity to downscale some of the assets on the balance sheet, as some equipment and fittings have become very expensive to maintain. Julian wishes to dispose of some redundant equipment that he believes has little value. However, he has heard that ASIC is cracking down on small companies that dispose of their assets. Required: He comes to you for advice about the parameters for disposing of the company's assets to avoid personal liability for this business decision. 6. The directors of Retrofit Pty Ltd decide to have an external transport company deliver the clothing to their customers. Bev is a director of Costumerie Specialist Transport Services Pty Ltd (CSTS) along with her husband. They own 100 per cent of the company and are the only directors. CSTS tenders for the contract. Required: Does Bev have a conflict of interest? If so what is it? If there is a conflict of interest, what can Bev do? What if Bev only held 2 per cent of the shares in CSTS? Would this situation be different?