Parent Company Ltd (“PCL”) has various subsidiary companies. Two of these are A Ltd and B Ltd.

A Ltd is not a wholly-owned subsidiary: PCL bought a stake in it a few years ago from Mohammed and Sarah, who founded A Ltd. PCL now owns 70% of A Ltd’s shares. The other 30% is owned by Mohammed and Sarah, who each own 15%. A Ltd has five directors: three of the PCL directors appointed by PCL to A Ltd board (the “PCL directors”) and the other two are Mohammed and Sarah.

B Ltd (which is a wholly owned subsidiary of PCL) is in financial difficulties.

A board meeting of A Ltd is convened, which all the directors attend. The PCL directors inform the board that PCL is very concerned about B Ltd’s difficulties, but considers them to be short term problems only. PCL also thinks that B Ltd’s survival and success is important to the PCL group (including A Ltd) and proposes that A Ltd make a large loan to B Ltd.

This loan is voted through at the board meeting of A Ltd, although Mohammed and Sarah, vigorously protesting, vote against the resolution. They are not convinced that B Ltd has (or ever will have) the capacity to repay the loan. They also think that it may leave A Ltd itself in difficulty in paying its creditors. The PCL directors dismiss Mohammed and Sarah’s concerns and the resolution approving the loan to B Ltd is passed.

Meanwhile, one of the PCL directors hears from his friend in a pub that the property next door to A Ltd is for sale at a very good price. For A Ltd this could be a good opportunity to expand, but at an earlier board meeting (attended by all five directors of A Ltd) it has been decided that due to the ongoing Covid-19 pandemic A Ltd should, probably, refrain from expanding for some time.

Regardless of that board meeting decision, the PCL directors bought the property next door to A Ltd in their own names last week, not informing A Ltd, Mohammed or Sarah of their decision.

Advise which duties towards A Ltd may have been breached by the PCL directors in this situation and the possible liability for breach of these duties.

Answer rating: 100% (QA)

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