Robin is a successful architect and has extensive expertise in advisory work fro

Question

Robin is a successful architect and has extensive expertise in advisory work from his role as the previous NSW State Architect. His best friend Kate is the managing director of Ready Build Ltd a large property development company. With the boom in Sydney real estate and at the request of Kate who told him “Our company is going gang busters we are so busy we desperately need an in-house architect” Robin accepts a non-executive director role with Ready Build Ltd on 1 October 2016. Robin accepts the role on the understanding that his role is confined to “providing planning and design advice” and Robin has said on a number of occasions to Kate “I’m a drawings kind of guy not a numbers and figures guy”. Subsequently Robin never attends board meetings and signs documents on Kate’s advice.

Over a period of twelve months, from June 2016 to June 2017, Ready Build Ltd experienced several episodes of cash flow shortages in its business operations. In December 2016 Ready Build Ltd commenced building a block of 50 apartments in Avalon. Unfortunately in July 2017 there was a major landslide causing total loss and devastation to the property and human loss and preliminary calculations estimate potential claims to be $50 million. In November 2017 the company appointed an administrator who became the liquidator in December 2017.

An investigation into the company affairs found that:

Upon appointment of a liquidator Kate paid all her employees a payment of $20,000 each totalling $2 million for their loyalty and service to the company; and

It was found that in late October 2016 Ready Built Ltd engaged a geotechnical engineer to write an extensive report on the soil activity and stability of the Avalon land site and the recommendation was to keep digging until they hit rock. At a board meeting in November 2016, Kate and the board of Ready Build Ltd resolved to go against the recommendations of the report and build on clay due to the enormous expense of digging to such a depth. This decision ultimately caused the landslide. The minutes of the meeting recorded Robin’s attendance at the meeting.

The liquidator comes to you for advice whether any legal action may be taken against Kate and/or Robin to recover money as a result of breaches of directors’ duties under general law and the Corporations Act 2001 (Cth).

Explanation / Answer

The Corporations Act 2001 (Cth) requires that a company director or other officer exercise their powers and discharge their duties with care and diligence. This duty is subject to a business judgement rule that requires a director making a business judgement to:

1. Make the judgement in good faith and for a proper purpose.

2. not to have a material personal interest in the subject matter of the judgement.

Here, in this case Kate should be liable for this loss as he breaches his duties of director under general law and the Corporations Act 2001 (Cth). As a director it is his responsility to act with his due dilgence.

Non-Executive director, taking no active role in the management of the organisation. This type of non - executive is sometimes referred to as a sleeping director. Though Robin was a non - executive director he should be liable for the loss.

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