What is your advice to the liquidator about whether any of the directors have breached any duties and the consequences of any such breaches?
Cool Climb Pty Ltd is a company which designs, manufactures and sells specialist climbing equipment. Their climbing equipment is popular with extreme sports enthusiasts, who pay the average price of $5,750 per climbing kit because of the high quality of materials and components in the manufacture of the equipment. The directors of Cool Climb Pty Ltd are Emily, Alex, Soong and Kim. Emily, Alex, Soong and Kim each hold 15% of the ordinary shares of Cool Climb Pty Ltd. Minority shareholders own the remaining 40% of the shares.
Drawing on her marketing skills, Emily is responsible for identifying and researching product opportunities for the sale of climbing equipment by Cool Climb Pty Ltd. Emily learned that the Australian Defence Force was about to put out a tender for the purchase of 2,800 kits of climbing equipment by Special Operations Command. Excited by the opportunity to secure such an important market, Emily tells Alex, Soong and Kim all about it. At this time, sales of complete climbing kits had fallen sharply with the monthly sales figures reports showing the sales of complete climbing kits to be very small in number compared to the sale of smaller, less expensive, single items. At the same time, Cool Climb Pty Ltd’s chief financial officer prepares a report showing that, unless Cool Climb Pty Ltd wins the Defence contract, it will be unable to service bank loans which it needs to operate or pay its suppliers’ invoices as they fell due. The directors each receive a copy of the reports in hard copy and by email, but fail to read them.
The directors think that they can make more money for themselves by forming another company which can tender for the supply of the climbing kits. The directors hold a directors’ meeting of Cool Climb Pty Ltd and pass a resolution that Cool Climb Pty Ltd will not lodge a tender to win the contract because Cool Climb Pty Ltd was not able to manufacture the climbing kits cheaply enough to make a profit, given that the cost of the high quality materials used the manufacture of the kits had recently increased in price. Soong did not attend that directors’ meeting as she strangely fell ill immediately beforehand.
Alex, Emily, Soong and Kim form a second company named Climberz Pty Ltd. Climberz Pty Ltd then enters into a contract with Cool Climb Pty Ltd to use one of Cool Climb Pty Ltd’s manufacturing facilities to construct the climbing kits. The terms of this contract are fair to both Cool Climb Pty Ltd and Climberz Pty Ltd.
Climberz Pty Ltd wins the contract to supply climbing kits to Defence and the directors make large profits.
Meanwhile, Cool Climb Pty Ltd continues its business of designing, manufacturing and selling specialist climbing equipment but it is in serious financial trouble after missing out on the Defence contract. At a meeting of the directors, Kim, who is Cool Climb Pty Ltd’s head of design, unveils a new design for climbing equipment specifically for use in temperatures below 40oC. Kim tells the other directors that Cool Climb Pty Ltd should go into full scale production of this new design. To save development costs, Kim has not built a proto-type or undertaken any testing of the new climbing equipment but still recommends the design. The other directors, who had never seen the design before the meeting and who had not undertaken any market research to ascertain what products were in high demand by extreme sports enthusiasts, simply agree with Kim without making any further enquiries.
The new design is released on the market. However, sales are poor as the market for climbing equipment which can operate in such extreme cold is very small. Australian extreme sports enthusiasts prefer equipment that can operate in the harsh heat of the Australian environment, which the new design cannot as the material from which it is manufactured becomes unbearably hot when exposed to sunlight. Cool Climb Pty Ltd suffers huge financial losses and is placed into liquidation.
The liquidator comes to you for advice. What is your advice to the liquidator about whether any of the directors have breached any duties and the consequences of any such breaches?
