You are the accountant for The Biggest Loser Pty Ltd, a health and fitness company. The directors and shareholders are Michelle, Hayley and Stephen. Michelle is the managing director and manages the day to day operations. Hayley who was an Olympic champion swimmer has no tertiary qualifications is in charge of marketing and sales. Stephen is a non-executive director and takes no active part in the affairs of the company. He is a good friend of Michelle and is only acting as a director to help out Michelle. He is a qualified sports scientist.

From the accounts that you have prepared, the company has traded profitably for the last three years. However a competitor recently opened up a fitness and health centre in the same suburb and the company's profits have decreased significantly. The cash flow budgets you have prepared for the company show that it will not have sufficient cash in the next 18 months unless it raises fees or reduces costs.

Hayley thinks that the company should relocate and move to bigger premises in a new area where there is no competition. She is confident she can generate more sales for the company. Without telling either Michelle or Stephen she inspects a newbuilding and comes to the view that it is the perfect building and location. She has not looked at any other buildings. If she had read and understood the financial accounts she would have realised that the rent was too expensive for the company, unless the income increase by three fold.The reason she was keen on the building was that it was owned by her brother Ian who is desperate to sell so he can clear his business debts. Hayley has been helping him meet his loan repayments.

Hayley does not think the additional rent will be an issue as she can generate more sales to cover the costs. Hayley calls a board meeting and tell the other two directors of the proposal. She does not disclose to them she has only looked at one property and that it is owned by her brother. There is no independent valuation done of the property. All she provides to the other directors is an analysis that you as the accountant have prepared showing the estimated increase in income less the increased expenses and still showing a profit for the year.

Because Stephen is busy with his practice and Michelle is busy worrying about other issues, they do not ask many questions and accept Hayley's recommendation.

However all did not turn out well. The building needed a substantial fit out and customers were no longer keen buy health products because of recent adverse publicity.

REQUIRED:

The directors ask you to attend their board meeting and request that you advise them of whether they have breached any of the duties as a director at common law.

In your answer you must refer to relevant case law.