Sourplum Pty Ltd (Sourplum) is a food manufacturing company that produces jams, sauces and other condiments that are sold in specialty grocery shops. The directors of Sourplum are Sarah, Winda and Ben. Sarah is a trained chef and has very good knowledge of food production. Winda has a business accounting background and she tends to look after the company's finances and refers to herself informally as 'the CFO'. Winda's cousin Ben was appointed as a director on Winda's request because he had been unemployed and needed something to keep him busy.

Sourplum's business had been doing well, and it had $80,000 in cash reserves. On 4 January 2021, Ben approaches the other directors with a new business idea. He presents a written proposal that Sourplum should invest $150,000 in a new readymade pasta company called Fasterpasta. Ben does not tell Sarah or Winda that he is actually the majority shareholder in Fasterpasta. Winda has a quick look at the proposal but does not investigate whether Fasterpasta is a viable business opportunity because she trusts her cousin Ben. Sarah does not read the written proposal at all because she is too busy formulating a new sauce recipe and she always relies on Winda's opinion on financial matters.

On 10 January 2021, the three directors decide to invest Sourplum's $80,000 in savings in Fasterpasta and they also take out a loan from ABC Bank for the remaining $70,000. Unfortunately, it soon becomes clear that investing in Fasterpasta was a poor decision because Fasterpasta was unable to compete with already established businesses in the readymade pasta market.

On 1 September 2021, because of the debt repayments it has been making to ABC Bank, Sourplum starts to experience cash flow problems and has to negotiate an extension on the electricity bill from its manufacturing premises. Starting to panic, on 10 September 2021 the three directors take out another loan from ABC Bank for $30,000 so that they can quickly launch Sarah's new sauce recipe. However, the new sauce is quite unpopular and Sourplum's entire business collapses. On 4 May 2022 a liquidator is appointed.

Advise whether the directors of Sourplum Pty Ltd have breached any of their duties under the Corporations Act 2001(Cth) and/or the general law. If so, explain the consequences of this. [25 Marks]

CHEGG SOLUTION

Did the directors of Sourplum Pty Ltd breach any of their duties? Yes, it is likely that the directors of Sourplum Pty Ltd breached a number of their duties under the Corporations Act 2001 (Cth) and/or the general law. Duty to act in good faith and in the best interests of the company Section 181 of the Corporations Act requires directors to act in good faith and in the best interests of the company. This means that directors must make decisions that they believe are in the best interests of the company, even if those decisions are not in their own personal best interests. In this case, it is likely that the directors of Sourplum Pty Ltd breached their duty to act in good faith and in the best interests of the company by investing $80,000 of the company's savings in Fasterpasta. Ben did not disclose to Sarah or Winda that he was the majority shareholder in Fasterpasta, and Winda did not investigate whether Fasterpasta was a viable business opportunity before agreeing to the investment. Sarah did not read the written proposal at all before agreeing to the investment. The directors' decision to invest in Fasterpasta was clearly not in the best interests of Sourplum Pty Ltd. Fasterpasta was unable to compete with already established businesses in the readymade pasta market, and the investment resulted in Sourplum Pty Ltd experiencing cash flow problems and having to take out more loans. Duty to exercise care and diligence Section 180 of the Corporations Act requires directors to exercise care and diligence in the performance of their duties. This means that directors must take reasonable steps to inform themselves about the matters they are making decisions about. In this case, it is likely that the directors of Sourplum Pty Ltd breached their duty to exercise care and diligence by investing $80,000 of the company's savings in Fasterpasta without first properly investigating the business opportunity. Winda did not investigate whether Fasterpasta was a viable business opportunity before agreeing to the investment, and Sarah did not read the written proposal at all before agreeing to the investment. The directors should have taken the time to properly understand the risks involved in the investment before making a decision.

Duty to avoid conflicts of interest

Section182 of the Corporations Act requires directors to avoid conflicts of interest. This means that directors must not put themselves in a position where their interests could conflict with the interests of the company.

In this case, Ben breached his duty to avoid conflicts of interest by failing to disclose to the other directors that he was the majority shareholder in Fasterpasta. Ben's interest in Fasterpasta conflicted with his duty to act in the best interests of Sourplum Pty Ltd.

Consequences of breaching Directors' duties

Directors who breach their duties can be held personally liable for any losses suffered by the company as a result of their breach. They may also be disqualified from being directors of other companies.

In addition,ASIC may take action against directors who breach their duties. This action may include prosecution, civil penalties, or disqualification from being a director. In the case of Sourplum Pty Ltd, the liquidator may be able to sue the directors for any losses suffered by the company as a result of their breaches of duty. The directors may also be disqualified from being directors of other companies.

Conclusion

It is likely that the directors of Sourplum Pty Ltd breached a number of their duties under the Corporations Act 2001 (Cth) and/or the general law. These breaches could lead to the directors being held personally liable for any losses suffered by the company, and they may also be disqualified from being directors of other companies.