Andrew and Brandon are two ambitious young men who were optimistic about the health supplements market in Southeast Asia and so they started a trading company a few months ago, called Alternative Health Pty Ltd (“AHPL”). Both are shareholders and directors of the company – Andrew being the Managing Director and Brandon a non-executive director. There is a third shareholder, Charles, with 15% shareholding in AHPL. In order to lend credibility to AHPL, Andrew and Brandon persuaded a common friend, Dennis, who is a trained pharmacist, to be the third director of the company. Dennis agreed reluctantly on the understanding that he was just going to be a “sleeping” (i.e. passive) director.
AHPL ordered various health products from manufacturers in Australia on credit, with the view of exporting them to distributors in SE Asia. Unfortunately, soon after the first few orders were delivered to AHPL, its target markets went into economic recession and consumers’ demand for non-necessity goods dipped drastically. AHPL managed to sell some stocks at discount so as to pay its suppliers. However, it had used up most of its working capital and was running low on cash flow to pay for its operating expenses.
One day, an unsolicited customer walked in to AHPL’s office-cum-warehouse and identified himself as a parallel importer for SE Asia markets. He gave AHPL staff a name card that shows his office address in Sydney CBD. He wanted to buy some health supplements in bulk and carry the goods upon presentation of a cheque for $50,000. He needed toimmediately transport the goods to the airport to catch a flight later that day. If AHPL would not sell on the spot, this customer would give it a miss. Andrew happened to be in the office and he was desperate to clear the unsold stocks. He authorised the staff to release the goods before the cheque was cleared by their bank as it was already past 3 pm. Andrew assessed that this well-dressed customer, who spoke confidently,was a decent businessman. To his horror, AHPL’s bank informed them the next day that the cheque was dishonoured – it being a forged document. The cost of goods lost amounted to about $30,000.
Brandon has his other own business, providing business consultancy to Chinese clients wanting to do business in Australia. Undeterred by what happened to AHPL, Brandon believed that their bad luck would be temporary. He read from articles in reputable business newsmagazines published in Hong Kong that China would soon relax the rules on importation of foreign-made health supplements. He believed this would be an opportunity to turn around AHPL’s fate. Andrew was a little concerned initially, having just made a mistake, but he did not want to see the business closed down so soon. Brandon assured Andrew that a business analyst friend had also shared with him that the Chinese market would be the next growth engine of demand for health supplements. So, they procured AHPL to order larger quantities of goods from its suppliers on credit.
This turned out to be a poor business call. In the following week, the Chinese government issued a notice quashing the rumour about relaxation on import. At the same time, the Chinese newspapers published some research reports about the adverse side effects of certain health supplements. All the prospective Chinese distributors declined to place orders with AHPL. This time, AHPL defaulted on payments to its suppliers.
Charles learns about the $30,000 loss and tells Andrew he will sue Andrew for compensation. He also wants to hold Andrew and Brandon responsible for purchasing excessive stock which could not be sold, and as a result causing AHPL to become insolvent.
AHPL’s suppliers threaten to apply to the court to wind up AHPL and to hold all three directors personally liable for the debts owed to the suppliers.
(a) Whether Andrew has any liability for the $30,000 loss; (5 marks)
(b) Whether Andrew and/or Brandon has/have any liability for purchasing excessive stock and causing AHPL to become insolvent;
(c) Whether all three directors or any of them shall be personally liable for the debts owed to the suppliers;
(d) Assuming a director probably has liability under question (a) or (b), whether Charles himself can sue that director for damages; and
(e) Whether there is ground for ASIC to step in to take action against any director. ( 2 marks)