Noodles Ltd operates a wholemeal noodle outlet. The company has three directors, Hong, Li and Luwa. Hong is the managing director. Li left school when he was 15 and has no further qualifications other than being an expert on wholemeal noodle manufacturing. He is in charge of the manufacturing process. Luwa is a non-executive director and was only appointed to the Board because she comes from a wealthy family and has connections with financial institutions.

Noodles Ltd has been trading profitably until six months ago when a competitor selling seaweed noodles emerged and is rapidly gaining market share. Hong thinks that Noodle Ltd should open up outlets in major shopping centres.

Hong calls a board meeting and tells Li and Luwa that by opening an outlet in the most expensive and prestigious city shopping centre will solve all the company’s problems. He says that they will have to act quickly as the seaweed noodle competitor is also interested in that outlet. Hong does not tell Li and Luwa that he has not carried out a feasibility study into the financial implications of this proposal. Hong also proposes that they should issue shares to Luwa’s brother to fund the proposal and advises Li and Luwa that this will also prevent the seaweed noodle manufacturer from taking over their company.

Luwa is doubtful about the whole proposal and feels that they are being rushed into making a decision without being given time to consider alternatives. Li however agrees to Hong’s proposal without really understanding the financial implications.

Within 6 months of opening the new outlet, it becomes apparent that the company was not in a financial position to have taken such a step and a proper feasibility study would have shown this. The company is unable to pay its debts and a liquidator has been appointed.

REQUIRED

(a) Advise Hong, Li and Luwa whether they have breached any duties under the Corporations Act and case law in making the decision to open the outlet. Also discuss any defences they may have.

(b) Advise the directors whether they have breached any duties under the Corporations Act and case law in making the decision to issue shares to Luwa’s brother.

Advise the directors of the procedures that should have followed under the Corporations Act in making the decision to issue shares to Luwa’s brother

Answer rating: 100% (QA)

a Here in case of Noodles Ltd company There are three directors Hong Li and Luwa Hong is the managing director Li is in charge of the manufacturing process Luwa is a nonexecutive director and was only ... View the full answer