Management of Companies & Directors’ Duties

Research Question
Research Problem Question

Warthog Pty Ltd (‘Warthog’) is an aviation company whose main activities are to transport goods throughout the remoter areas of Australia using its fleet of 6 Cessna light aircraft. Warthog employs 40 people and has an annual turnover of $5.5 million. Warthog has 3 directors: Nala, Simba and Scar. Simba is a pilot and while very knowledgeable about aviation does not take any interest in the financial affairs of the company. Scar is also a partner in FlyingHigh Partners which supplies fuel to Warthog but he has disclosed this to the other directors.

Nala is the managing director and was appointed for 4 years in 2010 subject to a contract. One of the terms of the contract restricted her from borrowing more than $100 000 on behalf of Warthog. Nala has not been formally reappointed and no new document of appointment has been lodged with ASIC.

Scar lobbied the other directors to sign a contract with FlyingHigh to supply a cleaner, more environmentally friendly fuel which is also more expensive than the current fuel that the Warthog aircraft use. The other directors do not know that Scar will get a very large commission if Warthog signs the contract, however the signing went ahead on 6 January 2015. On 10 January, Scar used his commission to pay for a 6-month cruise in a first class cabin on the ship ‘Pride of Africa’. On 12 January Scar boarded the ship and departed from Australia and was thus un-contactable by mobile or internet until 12 July 2015.

Nala approached Cheatem Bank on 15 January 2015 and asked to borrow $300 000 on behalf of Warthog. Cheatem has been Warthog’s banker for a number of years. Nala told Cheatem that the money was for the purpose of commissioning the building of an airport at a remote location. This would be very profitable for Warthog as there is a nearby mine (‘GoldDigger’) and Warthog has a lucrative transport contract with GoldDigger.

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Nala executed the loan contract on behalf of Warthog on 18 January 2015. Nala placed the money into a similarly named (‘Warhog’) bank account in the Cayman Islands on 19 January and fled Australia.

Simba made little effort to enquire about the fate of his fellow directors or participate in the running of Warthog during the next few months. As a result of this inattention, Warthog breached its contract with GoldDigger and the size of the compensation that Warthog must pay causes Warthog to become insolvent on 30 May 2015.

A) Is Warthog legally bound to repay Cheatem the funds advanced for the loan? [15 marks]
B) To what extent, if any, has Scar breached his duties as a director? [5 marks]
C) To what extent, if any, has Simba breached his duty as a director? [10 marks]