PART B: Questions 5 - 6

Case study Questions

Use case references and legislation (Corporations act 2001) to support your answers wherever appropriate.

Question 5

Des Watson was the sole director of a small engineering company for 10 years, known as D & S Engineering Pty Ltd "(D & S)". The company employed 25 workers at 2 factories in Sunshine and in Dandenong which it owned but which were also heavily mortgaged. It had paid large dividends to its shareholders following some excellent profit results in the past few years & the prospects for 2019/20 looked good.

There were only 4 shareholders in this company, Des himself and the 3 daughters of Stan Smith, Nancy to whom Des was married, Wendy & Carmel. Stan had died four years ago, and his daughters inherited their shares from the Estate of their late father. Des had been the engineering specialist while Stan did some of this work, but he attended to all management issues in the company.

In those last 3 - 4 years as the profits rolled in, Des had developed some bad habits as he now calls them. These included spending days and weeks away from work at his beach house at Sorrento where he played golf regularly and from where he managed the business remotely.

Other "bad habits" included not returning telephone calls, especially from pesky customers - "if they wanted him that badly, they could ring him back" - was his attitude. He was not that good at reading any emails or correspondence and often did not review the company bank statements for days or occasionally for a week or 2.

Des also admitted to Bev his bookkeeper for the past 5 years & to Maria his taxation accountant and business advisor, that he was taking a "a bit of a risk".

With the good times continuing, about 2 weeks before Christmas in 2019, Des began living at his beach house for an extended stay for a month including playing his daily game of golf.

He was intending to stay there until the factories reopened in January 2020. Bev, who only worked 1 - 2 days per week was left in charge with instructions to get in touch with Des if any extreme problems arose.

On December 15, Des's mobile alerted him to the first of several messages and later emails which were coming from Henry Cross, who was the CEO of his biggest customer, Ace Contractors Pty Ltd - "(Ace)" demanding an urgent meeting. Des had decided however that he was 'already on holidays' until January ignoring every single communication from Ace - about 5 or 6 - and several frantic calls from Bev, who had also been contacted by Ace.

If he had checked any of these communications, he would have read that Ace was extremely disappointed with the quality of work completed by D & S during the previous few months and was demanding answers. The final email arrived from Ace was sent on 21 December and gave Des 2 days to provide a clear plan to resolve these issues or risk losing the Ace account.

On January 14, the first day of business for 2020, Des received an email from Henry Cross politely informing Des that Ace had taken all its business away from D & S and had moved to a competitor, effective immediately!

Henry also had advised Des that the $75,000 which was due to be paid later in January would not be paid due to the costs which Ace was facing in having to "fix up the recent dodgy work completed by D & S"!

The loss of the Ace account amounted to between 35% - 40% of the gross income of D & S and plunged it into an immediate financial crisis.

Both Bev and then Maria strongly advised Des to immediately cut costs including terminating 1/3 of the employees and selling the less profitable Sunshine factory. Des had always been a proud man, and declined to accept their advice, continuing to pretend to the outside world and the shareholders that nothing was wrong.

In early February, Des had met with the company's bank manager seeking a further loan of $50,000 for short term financial assistance and was asked to supply current financial statements.

After 10 days, and even though the company had rarely had financial problems before, the Bank refused to assist given that both factories were already heavily mortgaged & its current business loan was about to exceed its limit of $100,000.

During the rest of February and all March, Des spent nearly all his time working out a secret plan to play for time with the creditors while also hoping to persuade Ace to return. Bev said total debts of D & S would amount to over $250,000 by the end of March.

Over the next 2 months, several creditors found their regular payments were delayed by many weeks but Des persisted with his "business as usual" comment to all outsiders. Unfortunately, by the end of March, D & S had received 4 statutory demands and several letters from creditors, the total amount being claimed was about $125,000.

It is now April 2020 when the shareholders are expecting their next dividend and there is no hope of any payment being made. A petition to wind up D & S has just been served on the company.

Des seeks your urgent advice on the following matters

1. Having regard only to the facts above, please identify what possible breaches of duty as a director could Des have committed?