Question 1

Fur Pty Ltd (Fur) has three directors: William, Michelle and Janet. William was the managing director of the company while Janet and Michelle are non-executive directors of the company. Janet, an experienced business woman, is not involved in the affairs of the company. She leaves the running of the company to William and she relies on him. She believes that if there is a problem with the company William will contact her. Michelle is William's wife. She is not involved in the affairs of the company and she always relies on William and never questions his management of the company because she loves and trusts him.

Since his appointment in 2004, William has kept all cheque butts, bank statements, invoices and receipts in a filing cabinet drawer in the company's office. Due to the pressures of work, he has not been able to write up the details in any cashbooks, journals or ledgers for 5 years. In June 2009, the

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company's financial position worsens. William knows the company is in financial difficulty but does not mention it to the other directors because he does not want to worry them. He believes that the company's financial problems are related to a curse and he has taken steps to remove the curse by going to a witch who blessed the company and told him that the company's financial situation will improve. William wrote a report telling the directors that the company has never been in a better financial position. His report did not refer to any particular information that may justify his assumption. As a result of the report, the board of directors decide to pay dividends to the members. Shortly after the payment of dividend, the company goes under liquidation and a liquidator is appointed. The liquidator starts investigating the affairs of the company and would like to take action against the directors.

Advise all parties. You must refer to relevant sections of the Corporations Act 2001 (CTH) and cases law to substantiate your arguments.

For this problem question students should address the following questions and discuss the general law and statutory duties. Use the ILAC/IRAC method to discuss if each of the directors, William, Michelle and Janet have breached directors' duties.

a) Start with identifying the duties that each of the directors owe and may have breached in the given scenario? (s 181 (1)(b) - statutory duty to act for proper purpose and in the best interest of the company, consider if the directors have breached the duty of care, and if there was a breach of s 180, s 588G etc.

b) Consider whether William, the managing director of the company, breached his duty to keep proper financial records? Refer to Ch 5 & 6 prescribed textbook, Australian Corporate Law for duty of directors to keep proper accounts, William has also breached the duty to prevent insolvent trading.

c) Discuss also when the company is deemed to be insolvent, what are the reasonable grounds to suspect insolvency (refer to chapter 18 [18.15]) and if the director/s in this case William has caused the company to become insolvent due to a breach of duty of care and diligence, (s 180(1). discuss if he can raise the business judgement rule as a defence. Consider the breach of duty and if the defence under s 180 (2), chapter 17 [17.22] - reliance on a witch's predictions that the company's financial situation will improve will be successful. Refer to chapter 17 [17.10, [17.15] - [17.19], and Figure 17.4.

d) When did the debt occur - chapter 18 [18.13], [18.14]

e) Can the company pay dividend under the circumstances?

f) Discuss the consequences of breach. Directors may face civil and criminal penalties (e.g., criminal penalty for breach of s 184, s 588G) for breach of directors' duties.

g) Refer to chapter 18 [18.18] - defences for insolvent trading.

h) Discuss the remedies that may apply for the company for breach of directors' duties? Refer to common law and statutory remedies - [15.17], see also chapter 15, Figures 15.4 and 15.5 - civil penalties - Compensation orders and pecuniary penalties.

i) For Michelle and Janet - consider the general law duties and statutory duties owed by Michelle and Janet. The duties owed will be the same as that for William, consider if they have breached their duties. refer to chapter 17, para [17.20] and Figure 17 on the law applicable to Michelle and Janet. Absence from management - they are both non executive directors - Consider if they will be successful in raising the defence reliance on others - s 189. Deputy Commissioner of Taxation v Clark (2003)