BLAW5016 Fundamentals of Business and Corporations Law

Case

Exotic Ltd, a listed Australian public company provides exclusive luxurious and exotic holidays and operates a water front resort on a remote Pacific island. Joel is the managing director of Exotic Ltd. The other two directors are Bill a non-executive director appointed due to his connections with banks and financial institutions and Bibi, a Pacific islander with local connections. Bill lives in Perth and finds it difficult to attend monthly directors’ meetings on the island. He has missed the last two meetings and also cannot attend the next one, as he has a birthday party in Perth.

At the next meeting, the directors are to consider the company’s financial position and a loan. Over the last few years the water in front of the resort has been showing increased algae presence due to climate change and the directors have been aware of this. However this year the algae bloom is so bad that the guests have been unable to swim or go into the water. As a result, the cost of the on-going treatment plan has increased drastically.  The company providing the treatment, Pacific Algae Treatment Inc, has stopped work as payments from Exotic Ltd are overdue. The directors of Pacific Algae Treatment Inc have informed the directors that Exotic Ltd has no choice but to incur major costs of treating the algae bloom and then contain the treated water by building a surrounding wall. The directors may need to consider obtaining a loan from Shark Finance Pty Ltd to pay for the major cost of treating and containing the algae bloom.

Bill believes that it will not matter if he does not attend the meeting because, after missing so many, he is not up to date with the company’s financial position. Also, he thinks it is better if the other directors are not aware of his father’s connection with Shark Finance Pty Ltd so they would not be biased to support it. 

At the board meeting, the directors decide to follow advice from Pacific Algae Treatment Inc and change the algae treatment plan and build a surrounding wall so that the resort will continue to attract wealthy high spending tourists. Financial plans provided by the company accountant to the directors indicate that this should enable the company to trade out of its financial difficulties. A decision is made to obtain a large loan from Shark Finance Pty Ltd to pay the past amounts owing to Pacific Algae Treatment Inc to cover the more expensive algae treatment and to build a surrounding retaining wall.

A few months after the renovations are completed the only major airline servicing the Pacific island ceases operations due poor demand arising from the publicity of the algae bloom on that island.  Only a small airline offering budget tourist packages is prepared to operate on the island, but such guests will not pay the higher charges of the resort. Shortly thereafter, Exotic Ltd fails to pay interest due on the Shark Finance Pty Ltd loan and a liquidator is appointed to the company.

Questions:

Discuss the following matters [referring to the Corporations Act 2001 (Cth) and cases and the uploaded research material in part (a)].

(a) Research and upload five Australian articles relating to directors’ duties and climate risk that will assist you in answering part (b) below. Your articles can be from cases, case notes, journal articles, opinions and publications from legal firms, Government bodies such as the ASIC, APRA, and other specific climate change related bodies etc.

(b) Discuss if the directors of Exotic Ltd (listed company) could be held liable for breach of duty of care and diligence in failing to take steps, including failure in reporting financial risks to the shareholders, in relation to the foreseeable climate-related risks that may have caused harm to the company, including reputational harm.

(c) Whether the conduct of Bill or the other directors could make them liable for any of the debts of Exotic Ltd as a result of the company’s insolvency and defences they may have against the liability.