Question One:

Joe, Kamala and Donald are the only directors of Air Force One Ltd ("AFO"). AFO owns a business purchasing second-hand airplanes, refurbishing them and reselling them at a profit. Joe is the managing director and Chairperson. Donald and Kamala are non-executive directors. Donald is a trained aeronautical engineer.

One afternoon Joe received a call from his friend Luke who is an airplane broker located in Arizona in the United States. Luke has extensive experience in the airplane industry and is extremely knowledgeable about the purchase and sale of aircraft in the United States. Luke tells Joe that he could broker a deal to sell AFO two King Air 360 planes for $5.5 million each. He said they had done very little flying time, were in excellent condition and were a bargain at that price - they usually sell for $8.5 million. Luke told Joe that the planes were owned by a person called Sal Badguy ("Badguy") who had been indicted in the United States for drug trafficking. Apparently, the FBI claimed that Badguy had used the planes to transport drugs from South America to the United States. Luke said Badguy needed to sell the planes to get money to pay for his lawyer to represent him at the criminal trial.

Joe convened a board meeting. At the meeting he told the other directors about the planes and told them they were owned by Badguy. He didn't tell them about Badguy's pending indictment or criminal trial!! However, a simple Google search would have revealed the details of Badguy's indictment and that he had allegedly used the planes to traffic narcotics from South America. Relying solely on what Joe said, Kamala and Donald agreed to buy the planes. A unanimous directors' resolution was passed to that effect.

The planes were purchased by AFO and the purchase price was transferred to Badguy. Before the planes were transported to Australia, Badguy was convicted of drug trafficking. Under United States law, any asset used in the commission of a crime, including drug trafficking, can be seized by the government. Accordingly, and notwithstanding ownership had passed to AFO, the United States' government seized the planes, sold them and kept the proceeds. This caused AFO to suffer enormous financial distress as it couldn't recover the purchase price from Badguy as he had spent all the money on his lawyers and was now in jail. AFO was placed into liquidation.

Part A:

The liquidator now wants to commence an action against the directors of AFO for breach of their duty of care skill and diligence in connection with the Badguy plane transaction. Discuss whether you think the liquidator would be successful.(12 marks)

Part B:

The liquidator is investigating another transaction entered into by AFO. As part of that transaction, AFO purchased a Learjet 85 from a company called Sneaky Jets Pty Ltd ("Sneaky"). Donald owns 45% of the shares in Sneaky. The purchase price was $9.5 million which was a great price considering the market price for these jets was around $18 million. Indeed, AFO sold the plane two weeks after purchasing it for $18.5 million thereby making a tremendous profit.

Prior to the purchase by AFO, Joe told the board that Donald owned shares in Sneaky and the board, including Donald, passed a unanimous resolution approving the purchase of the jet from Sneaky.

Donald wants to know if he has breached any fiduciary and statutory duties to AFO in connection with this transaction. Remember to talk about conflicts of interest, section 182, 183, 191 and 195 and any other relevant matters.