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Legal Advice to Bell Ltd Director for Breach of Duties

Question

Bell Ltd is a company that installs kitchen facilities, and has four directors on its board:

- Abbey, the company’s managing director

- Bob, the company’s chief financial officer

- Cathy, the company’s non-executive director

- David, the company’s non-executive director chairman

The company’s business has been very successful. However, recently it has experience a number of problems.

Following the board decision to offer customers a special installation package, Cathy has negotiated an exclusive contract with Western Sydney (WS) Ltd. Cathy has not informed the board that WS is actually owned by her son. Bob suspects that Cathy is personally connected with WS, however, he has not raised his concern with any of the other directors. In addition, Bob made sure the other directors were kept in the dark about company’s real financial position and did not give them meaningful or accurate financial information for some time.

Despite Bell Ltd’s negative cash flow position, Abbey proposes to expand its operations into dishwasher installation. Cathy questions whether the company can afford the costs associated with the expansion. As a result, the board delegates to Bob the task to investigate Abbey’s proposal. Bob, however, spends very little time investigating the proposal due to his busy schedule, and hastily prepares a report recommending that the proposal be accepted.

The next board meeting is very long and the consideration of Abbey’s proposal and Bob’s report is the last item on the agenda. As the directors are anxious to leave, David allowed only 10 minutes for Abbey to present her business plan for the proposed expansion. Bob’s financial report produced after his investigation on the matter was tabled at the board meeting but he was not allowed to speak or answer questions. Nevertheless, the directors approved the proposal.

Following the approval of the proposal, Abbey entered into a contract with Southern Queensland (SQ) Ltd for the purchase of new equipment for the approved proposal. The contract is worth $20,000 and is never paid. Shortly after the contract was signed, the board discovered that Bob’s report had obvious mistakes as he has overlooked many of the additional costs involved in the expansion.

Assume that Abbey’s proposal has been proved to be a financial disaster for Bell Ltd, and as a result, the whole board of directors were replaced.

Advise the new directors of Bell Ltd whether its former directors breached any of their duties based on the facts stated above. Any defences available to the formal directors under the Corporations Act 2001 (Cth) to avoid liability?

Summary

This question belongs to business law and discusses about a company’s directors breach of their duties based on the events in the case study.

Total word count: 2590

 

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