Question 3:

Bill and Simon were the executive directors of an unlisted public company called First Class Racing Ltd. Philip, Helen and Robin were the non-executive directors of the company. Philip was also the chairman.The company is involved in the development of an on line betting system which they hoped to sell globally.

The company had initial funds from investors of $12m and 100 shareholders.

The funds were raised specifically to develop the on line betting system.

In May 2014 when Philip and Helen were away on holidays, Bill, Simon and Robin called a board meeting and passed the following resolution. The quorum required for board meetings was 2 directors.

The resolutions passed were:

1.To buy a race horse for up to $5m

2.To award the development of the software contract to a company called ITZW Pty Ltd at a cost of $502,078

When Philip and Helen returned from holidays they found out about these two transactions. Further investigation by them showed that the horse was owned by Bill's father in law who was forced to sell because of his impending divorce. Bill did not disclose this to the other three directors.

Bill, Simon and Robin did not get a valuation of the horse nor get it checked by a vet.

Unfortunately the horse got stung by a bee and developed an infection and later died.

The contract to ITZW Pty Ltd was proposed by Simon as his brother ran the company and was in need of work. The other two directors Bill and Robin did not ask questions and approved the contract.

Whilst overseas Bill on a holiday with his family he was offered an opportunity to invest in another on line betting company at no cost provided he could raise further funds for them. Bill did so and organised a further $500,000 for the other company. He received 50,000 shares worth AUD$5.36 each. Bill did not tell the other directors about this.

Required:

Philip and Helen on their return find out about all three transactions.

Advise them as to whether Bill, Simon and Robin have breached their duties to the company and what can the company recover from Bill, Simon and Robin.

YOU ARE TO GIVE ADVICE TO PHILIP AND HELEN WHO ARE THE DIRECTORS OF THE COMPANY THEREFORE THE FOCUS SHOULD BE ON THE COMMON LAW DUTIES OF THE DIRECTORS.

DO NOT GIVE MARKS IF STUDENTS MERELY STATE THE LEGAL PRINCIPLES AND DO NOT APPLY IT TO THE FACTS IN THE QUESTION.

LIST THE DIRECTORS AND WHAT THEY DID OR DID NOT DO

BILL:

BUY HORSE

ATTEND MEETING

NOT DISCLOSE THE OWNERSHIP OF HORSE WAS HIS FATHER IN LAW

AWARD CONTRACT FOR SOFTWARE TO ITZW

HELPED OVERSEAS COMPANY RAISE FUNDS AND RECEIVED SHARES

NO VALUATION OF HORSE

NO DISCLOSURE OF THE SHARES HE GOT FROM THE COMPANY

SIMON:

ATTEND BOARD MEETING

DID NOT GET VALUATION OF HORSE

DID NOT DISCLOSE RELATIONSHIP WITH HIS BROTHER AND THE IT CONTRACT

Robin:

ATTENDS BOARD MEETING

DOES NOT GET VALUATION

APPROVES IT CONTRACT

APPROVES PURCHASE OF HORSE

WHAT CAN THEY COMPANY RECOVER?

LOOK AT THE CLAIMS UNDER COMMON LAW: COMPENSATION FOR LOSS, THE VALUE OF THE SHARES

COMMON LAW PRINCIPLES TO BE DISCUSSED:

DUTY TO ACT AS FIDUCIARY

DUTY TO ACT WITH CARE AND DILIGENCE

DUTY TO ACT IN GOOD FAITH, IN THE INTEREST OF THE COMPANY AND FOR A PROPER PURPOSE

DISCUSS THE ACTIONS TAKEN BY THE THREE AND APPLY THE PRINCIPLES TO WHAT THEY DID OR DID NOT DO

BILL: LACK OF CARE AND DILIGENCE, LACK OF GOOD FAITH AND CONFLICT OF INTEREST. DISCUSS THE NEED TO DISCLOSE AND S 191 AND S 195 AS IT IS A PUBLIC COMPANY.

SIMON

DUTY OF CARE AND DILIGENCE AND CONFLICT OF INTEREST

APPLY PRINCIPLES TO WHAT THEY DID.

ROBIN

LACK OF CARE

IF STUDENTS MENTION THE STATUTORY PROVISIONS THEY HAVE TO BE ABLE TO RELATE IT BACK TO THE QUESTION IE WHO CAN ENFORCE THE STATUTORY DUTIESIE ASIC BUT THE QUESTION LOOKS AT IT FROM THE COMPANY'S VIEW NOT ASIC.

ALSO IF THEY TALK ABOUT THE PENALTIES THAT ASIC CAN IMPOSE NO MARKS AS THE QUESTION DOES NOT ASK FOR THIS.

WHAT CAN THEY RECOVER FROM THE THREE DIRECTORS?

COMPENSATION OR DAMAGES FOR LOSS

STATE WHAT THE LOSSES WERE. IE PURCHASE OF HORSE, NO VALUATION, VALUE OF THE SHARES