Deck 8: PART A: Directors and Officers Duties

Question 1

Under the common law, directors have a duty to avoid conflicts of interest, act in good faith and for a proper purpose and not to trade while insolvent.

Answer 1

False

Question 2

Lucy is a directory of Big Wheel Ltd ("Big Wheel"). Big Wheel operates a large bicycle retailing business. Lucy was a world class cyclist and is the "face" of Big Wheel. She has no business experience. Lucy has no duty to understand the financial aspects of Big Wheel's business as she wouldn't understand it anyway.

Answer 2

False

Question 3

As part of a director's duty of care, skill and diligence, they are expected to regularly attend directors' meetings.

Answer 3

True

Question 4

Ira is a director of a large company. The board can delegate some of its activities and roles to a third party who the board see fit to undertake those tasks.

Question 5

In order to ascertain whether a company is insolvent for the purposes of section 588G(1), the test is whether the company's liabilities exceed its assets.

Question 6

The safe harbour in s 588GA is intended to encourage directors to discourage directors from placing the company into voluntary administration prematurely.

Question 7

Lulu, Victoria and Uda are the directors of Blue Sky Ltd ("BS"). BS owns a newspaper publishing business. Lulu is an expert in the publishing business whereas Victoria and Uda are investment bankers and have no experience whatsoever in the publishing industry. BS needs to purchase new printing presses as the ones it owned were old and were constantly breaking down. Without doing any due diligence whatsoever, the board pass a resolution to buy new printing presses from Nasty Presses Ltd. Unfortunately, the new presses can only use a very expensive type of ink that needs to be imported from Argentina. The cost of purchasing the ink has caused BS to cause tremendous financial losses. Which of the following is true:

A) Victoria and Uda cannot be liable for this loss because they have no understanding of the printing industry and, therefore, can't have breach their duty of care and diligence.
B) None of the directors could be liable for breaching their duty of care and diligence because they didn't know that the presses required the expensive ink.
C) All the directors have potentially breached their duty of care and diligence because they should have undertaken certain minimum diligence before entering into the transaction, which would have highlighted the problem with the ink.
D) All the directors would probably be liable for breaching their duty under section 180(1) of the Corporations Act, but it would be highly unlikely they would have breached their common law duties of care and diligence.
E) While BS could pursue a cause of action against the directors for breaching their duty of care and diligence, ASIC has no standing to pursue such a cause if action.

Question 8

In order to exercise the minimum standard of care, directors and officers must, among other things:

A) Acquire a basic understanding of the business and be familiar with the fundamentals of the business.
B) Make sufficient enquires to inform business decisions.
C) Stay informed about the activities of the company.
D) Not ignore any misconduct of the company.
E) Be familiar with the financial status of the company by reviewing financial statements.
F) None of the above are correct.
G) All of the above is correct.

Question 9

Dale, Mary and Marcos are directors of Little Wave Ltd - a public company, which sells seashells. Dale is the managing director and Mary and Marcos are non-executive directors. Mary to the chair of the board and Marcos has extensive experience in the seashell sales industry. Which of the following is incorrect:?

A) It is possible that the standard of care owed by the three directors differs due to their position and experience.
B) All the directors owe certain minimum duties to the company such as undertaking the business of the company.
C) Dale could never owe any higher duty of care compared to Mary and Dale as executive and non-executive directors owe the same standard of care.
D) Mary may owe a higher standard of care as she is the Chair.
E) Dale, as the managing director has overall responsibility for the day-to-day management of the company's business.

Question 10

Luke, Maddi and Emily are the directors of a company that creates mobile phone apps called Angry Nerd Ltd. The board passed a resolution to retain an outside programmer to help with an app they were developing. The programmer did a poor job and the app was substandard. This caused the company to suffer reputational damage and this caused financial loss. Luke, Maddi and Emily are concerned they might by pursued for breaching their duty of care, skill and diligence. They would be able to rely on the business judgment rule in section 180(2) of the Corporation Act as a defence to any claim if:

A) The decision was a business judgment as defined in section 180(3);
B) The decision was made in good faith for a proper purpose;
C) They did not have a material personal interest in the decision;
D) They reasonably informed themselves about the subject matter of the decision to the extent they reasonably believed to be appropriate;
E) They rationally believed that the decision was in the best interest of the company;
F) All the foregoing is necessary to be established.

Question 11

Jamie and Larry are the only directors of Titanic Pty Ltd. Mary is the Chief Financial Officer of Titanic Pty Ltd. It has been determined that Titanic Pty Ltd was insolvent and during the time it was insolvent it traded thereby incurring debts. Which of the following is incorrect:?

A) Jamie, Larry and Mary may face liability under section 588G for insolvent trading.
B) Jamie and Larry could possibly be found to have committed a criminal offence.
C) Even if they have breached 588G, the directors of Titanic Pty Ltd may avoid liability if they can establish a defence under section 588H.
D) There would only be a breach of section 588G if at the time of incurring the debts, Titanic Pty Ltd's liabilities exceeded its assets.
E) If Titanic Pty Ltd paid a dividend while it was insolvent, this would be automatically deemed to be an incurrence of a debt for the purposes of section 588G.

Question 12

In order for there to be a breach of section 588G, which of the following elements must be established:

A) The person must be a director of the company.
B) There must be an incurrence of a debt.
C) The company must be insolvent at the time the debt is incurred.
D) There needs to be reasonable grounds to suspect the company was insolvent.
E) The direct must be aware the company is insolvent.
F) All of the above need to be established.
G) Only (a), (b), (c) and (d) need to be established.

Question 13

What is a business judgement rule? Why did the government introduce such a rule in the Corporations Act?

Question 14

If a director breaches his/her duty of care, skill and diligence, what are the potential ramifications for the director?

Question 15

Why does the law impose duties upon company directors and officers?

Question 16

What are the directors' and officers' duties under common law and equity?

Question 17

List the directors' and officers' duties that apply under the Corporations Act.

Question 18

What is the interaction between the general law and statutory duties?

Question 19

List the sources of the directors' and officers' duty of care.

Question 20

How does a court decide whether a director has breached their duty of care? What is the minimum standard that is applied?

Question 21

If a director breaches his/her duty of care, skill and diligence, what are the potential consequences for the director?

Question 22

Does the standard of care differ depending on the type of director?

Question 23

Define "diligence" as used in s 180 of the Corporations Act

Question 24

What is a business judgment rule? Why did the government introduce such a rule in the Corporations Act?

Question 25

What is the duty to prevent insolvent trading under s 588G Corporations Act?

Question 26

Explain why a duty to prevent insolvent trading is imposed on directors by statute.

Question 27

When is a company 'insolvent'?

Question 28

What are reasonable grounds for suspecting insolvency?

Question 29

Explain the defences to liability for insolvent trading.

Question 30

Explain the purpose of the safe harbour against insolvent trading in s 588GA of the Corporations Act.