Directors Duties

Alan, Bryan, Clark, Diane and Elli were the directors of Gemsales Ltd, a company engaged in the business of importing and supplying jewellery as wholesalers to the local market.

The company decided that as the market was becoming more competitive it needed to expand its business as it felt with increased volumes of sales it would be able to lower its prices and be more competitive. In order to do so it obtained a $4 million dollar loan from the Friendly Bank Ltd. $3 million was used to buy more stock and $1 million was used to buy a large new warehouse and showrooms from Traders Ltd.

Clark was not at the meeting that had made these decisions as he was in hospital recovering from a serious accident. Elli, as was her usual custom, had not attended the meeting but signed the requisite documentation agreeing to the expansion of the business and the getting of the loan. Diane who attended, said she did not know if she agreed and abstained from voting. Alan and Bryan both voted to go ahead with the expansion and the getting of the loan.

At about this time Bryan has established contact with Vince, who was setting up a new business as a retailer of jewellery. Vince was looking for reliable suppliers, but said he would not deal with Gemsales Ltd as he did not like Alan, the Managing Director. Not wishing to miss out on such a lucrative business opportunity, Bryan arranged to set up his own business as a jewellery wholesaler and a contract was entered into between Vince and Bryan for the supply of jewellery.

Six months later, Bryan resigned as a director. At the same time it was clear the company had over-extended itself and was insolvent and could not pay the interest on its loans.

It also became clear that Bryan was a major shareholder in Traders Ltd and the other directors were unaware of this at the time of the purchase of the warehouse and showrooms. Furthermore, Bryan had been approaching other established customers of Gemsales Ltd and had secured orders...