QUESTION 8 Scenario 2: Electro-Start Limited ("Electro-Start") manufactures and supplies electric circuit boards. Shawn is a director of Electro-Start. He was previously the managing director of Electro-Start but has not been re-appointed. He however still continues to act as managing director with the knowledge and acquiescence of the board of directors. The demand for Electro-Start's more costly version of circuit boards has decreased. Orders have been reduced or cancelled outright. This has affected Electro-Start's cash flow significantly. All of Electro-Start's assets have been given as security to its bank for the loan provided by the bank to Electro-Start. The bank has refused to supply Electro-Start with further finance and the company has been unable to find alternative ways of raising capital. In November of the last year Electro-Start's major client went into liquidation. As a result, Electro-Start's cash flow came under significant pressure and the company has had to delay payments to its creditors. Most of the creditors have now put Electro-Start on 'cash on delivery ('COD') terms. Others have sent lawyers' letters threatening to commence legal action against Electro-Start to enforce payment of outstanding debts. Some cheques given to creditors as payment are dishonoured and the company taxes of $35 million are due and payable by the end of July. On the 1st of August, Shawn rings the Chief Financial Officer and asks about the financial status of the company. The Chief Financial Officer replies "All good. Things will improve". Shawn then enters a contract for the supply of a new production machine at a cost of $5 million as, without enhanced production, Electro-Start may not be able to meet new orders when things improve. Shawn does not consult the board of directors before entering into the contract. The other directors are unaware of the existence of the contract. The company taxes remain unpaid and no extension of time has been agreed to by the Australian Taxation Office. The other directors deny that Electro-Start is bound by the contract. Question: Part C The Business Judgement Rule is an important defence for breach of a director's duty. Explain what a business judgement is and set out the instances where the defence would apply