Q.1 Discuss whether there has been any breach of director's common law duties as well as their statutory duties.

 

Q.2 What is this duty of care and diligence. Is the duty of a non-executive director the same as those for executive directors.

 

Refer both case study as per attachment to answer it.

Question 1

Vietnam Coffee Ltd is a public company running a chain of coffee roasting business in Perth. The company has 3 directors : Van, John and Ky. Ky is the managing director. Van lives in Vietnam and has only attended one board meeting in Perth in the last 5 years.

The company was concerned about the high cost of green coffee beans and was looking for cheaper sources.

Van's friend Kao, operates a small coffee roasting business in Perth. Business is tough and Kao makes an offer to Van. If Vietnam Coffee Ltd enters into an 8 year supply contract with his company to only buy roasted coffee from Kao's company, then Kao will give Van a free trip to Europe and also a diamond necklace to his wife. Van agrees to this arrangement as he wanted to keep his wife happy.

In a directors meeting which Van attended ( only his second meeting), he informed the rest of the board that he has found a good supplier for coffee. He told the rest of the board that he has carried out extensive research and Kao's company was offering the best price and the best quality. The board voted unanimously in favour of the eight year contract. None of the other directors knew about the free trip and the necklace to Van's wife.

A few months later, Vietnam Coffee Ltd runs into serious financial problems, as customers do not like the taste of the cheaper coffee and also customers are moving to drink green tea. The company would like to escape the contract, but is locked into it.

John recently suffered a heart attack and has not been able to attend the last 4 board meetings. He is the coffee expert and does not do any due diligence on Kao's company or its coffee and merely agrees to Van's recommendation.

 

Discuss whether there has been any breach of director's common law duties as well as their statutory duties.

 

Question 2

Merlin bank ltd, a merchant bank, was experiencing a severe liquidity crisis and was also under investigation by government authorities. The Bank subsequently failed.

One of the directors had written a number of reports outlining the problems the bank had with its loan portfolio. This information was not passed on to Jackson, he being one of the directors, but a non-executive one.

Merlin Bank entered into negotiations to liquidate its loan portfolio and also mortgaged fees owed to the Bank.

Jackson discussed these matters with the executive chairman of the Bank and expressed his concern over a number of board meetings that had been cancelled. Jackson was on the board of the company to whom the fees were mortgaged and as such stood down from discussions on this matter.

ASIC subsequently commenced action against Jackson for failing to exercise reasonable care and diligence in the discharge of his duty as a director and that he failed to reasonably inform himself of the financial affairs of Merlin Bank.

 

What is this duty of care and diligence. Is the duty of a non-executive director the same as those for executive directors.