Mathew is successful chemical engineer. In April 2007, upon a request by, and as a favour to his friend Jack, Mathew became a non-executive director of Virtue Pty Ltd, a pharmaceutical company. Jack is the managing director of the company and he had an understanding with Mathew that Mathew does not need to attend any meeting since he is not receiving any remuneration from the company.

Mathew was supposedly in charge of policy and he always said to the rest of the directors of the company that: I am an expert in chemical engineering, not in financial matters. Accordingly, I rely on the managing director to tell me if there is a problem with the affairs of the company.

Virtue Pty Ltd started having some cash flow problems in 2011. In February 2012, the company went under liquidation. When looking at the financial record of the company, it was apparent that to the liquidator that the company was in financial difficulty for quite some time and has actually lost in excess of $10 Million. Some of reasons behind the loss where the following:

Virtue Pty Ltd had to replace some of its machinery at a net cost of over $5.6 million. The new machinery was non compliant with Australian safety standard and as a result the company was fined $900,000 for the breach. The company bought the machinery from MH Pty Ltd, an overseas company where Jack was a majority shareholder. The board of directors was not aware of the connection that exists between Jack and MH Pty Ltd. An independent experts report to the Board earlier warned against the purchase and recommended in preference the purchase of locally manufactured pumps which complied with Australian Standard at a cost of $2.3 Million. Mathew did not attend the board of directors meeting which voted in favour of the purchase.

In one of the Board meeting in 2011, the directors discussed the companys financial difficulty. As usual, Mathew never attended and had no idea of the difficulty of the company. He always assumed that Jack will contact him if there was any problem with the company.

The liquidator seeks your advice in relation to the liability of Mathew and Jack. Do not consider liability of directors under insolvent trading.

Use ILAC to answer your question with appropriate case law and legislations in Australia. Thanks