Tavid, Suzan and Dilara are the only shareholders and directors of Vintage Wedding Dress Boutique Pty Ltd (Vintage Dress) which sew and sell vintage boutique dresses. Tavid, Suzan and Dilara each have one-third equal share in Vintage Dress.
You should note the following regarding Vintage Dress:
- Tavid is a non-executive director and is a qualified accountant and the Chief Financial Officer. Tavid also sits on many board and sews the dresses.
- Suzie is the Managing Director of Vintage Dress and sells the dresses.
- Dilara is a non-executive director and never attends any meetings and never has a reasonable excuse for not attending.
Business had been very profitable for Vintage Dress for years so it purchased many new state of the art sewing machines.
Tavid recommended that Vintage dress buy their new sewing machines from Sew West Pty Ltd. Tavid states that it is the best sewing machine to provide for the large increases in sales and sewing. Tavid does not tell Suzan and Dilara that Tavid and her daughter control Sew West Pty Ltd. Suzan knows that Tavid has some form of interest in Sew West but does not tell Dilara and does not ask for any details from Tavid.
Last month, Vintage Dress was approached by a second hand fabric dealer named Second Hand Fabric Pty Ltd which suggested that the two companies should enter into a joint venture where Second Hand Fabric would provide fabrics and Vintage Dress would sew the fabrics and they would sell the garments in the second hand fabric store. After lengthy discussions, all three directors decided that due to the expansion of vintage dress, Vintage dress did not have the facilities and resources to be able to sew the dresses for Vintage Dress and those for the Second Hand Fabric Store. Shortly afterwards, Dilara acting on her own behalf, and Second Hand Fabrics formed a new company which successfully created garments to sell in the second hand fabric store and made very large profits.
By this stage, the company started making large losses. At a board meeting in August 2015,
the board considered the company’s in-house financial statements relating to the loss making investments. The financial statements have been negligently prepared and show a profit instead of a loss.
During the board meeting, Tavid didn’t draw the errors to the attention of the board, while Dilara failed to ask any questions about the financial statements, and was absent on this occasion. Due to time constraints, Suzie failed to read the financial statements, believing that Tavid would discuss the statements with her if there were any important matters requiring her attention.
The board directors do not identify the mistake and authorise further investment in the loss-making business ventures. By December 2015, Vintage Dress is insolvent.
Discuss any case law or statutory civil liability of the directors of Vintage Dress in relation to these events. What are the consequences, if any, of a breach of the Corporations Act?
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