Question

MUB investment Ltd (MUB) is a specialist financial management company that is listed on the ASX. MUB has many investors in Australia, and the company is generally highly regarded. MUB has 4 directors; Mr Shorter, Ms Drifter, Mr Shapeless & Dr Wittless

At a directors meeting in March this year, a proposal to purchase a small financial management company is discussed. The proposal is accompanied by a report detailing the financial status of a company called Perilous Business Pty Ltd.
Only 2 of 3 directors attend this meeting. Ms Drifter does not attend as she is away on holiday in the Caribbean. Mr Shapeless attends the meeting initially, however he leaves abruptly during opening proceedings for medical reasons (he has recently undergone emergency surgery). During the meeting, Dr Wittless glances over the financial report for Perilous Business Pty Ltd and comments that it "sort of looks impressive". Mr Shorter does not read the financial report for Perilous Business Pty Ltd, considering the opinion of Dr Wittless to be entirely reliable. Together, Mr Shorter and Dr Wittless approve the proposal for MUB to purchase Perilous Business Pty Ltd.
Not long after the purchase, it becomes apparent that Perilous Business Pty Ltd is financially unsound and purchasing the company has grave consequences for MUB, which appears to F have become insolvent. The shareholders of MUB are angry and wish to make the Board accountable for their decision-making.

Discuss the liability of each of the 4 directors on the Board of MUB in terms of their duties under the Corporations Act 2001 ?

Answer 1

The MUB directors may be liable for failing to exercise due care and diligence in their decision to purchase Perilous Business Pty Ltd. Mr Shorter and Dr Wittless actively participated without thorough review, while Ms Drifter and Mr Shapeless may face scrutiny for inadequate oversight. The event mirrors shortcomings in corporate governance witnessed in the Lehman Brothers collapse.

Step-by-step explanation:

The liability of the four directors on the Board of MUB in terms of their duties under the Corporations Act 2001 can be assessed based on their adherence to the duties of care and diligence, as required by the Act. Mr Shorter and Dr Wittless may be liable for breaching their duty of care, as they did not adequately review the financial report of Perilous Business Pty Ltd before approving its purchase. Ms Drifter, although absent, and Mr Shapeless, who left for medical reasons, may also face scrutiny for not ensuring that adequate due diligence was carried out in their absence. The situation is reminiscent of the lack of corporate governance that contributed to the failure of Lehman Brothers, where there was inadequate oversight and consideration of risks by the Board of Directors.

In terms of specific liability:

• Mr Shorter and Dr Wittless both participated in the decision-making process without thorough examination of relevant documents, possibly breaching their duty to act with care and diligence.
• Ms Drifter, although on holiday, still holds responsibility as a director and could be held liable for a lack of oversight and ensuring proper governance in her absence.
• Mr Shapeless faces a more nuanced situation; however, his abrupt departure and failure to reconvene or provide input might also be viewed as a failure to fulfill his directorial duties.

It is essential for directors to exercise independent judgment, closely scrutinize management proposals, and consider long-term risks to make decisions that align with the best interest of the company and its shareholders. The board's lack of due diligence greatly mimics the circumstances surrounding the Lehman Brothers collapse, where short-term gains were sought without due consideration of long-term sustainability and risk.