Question: The questions in IRAC method.

Topic: Directors duties and the regulation of corporate governance - Part 1

NB As for most of the problem sets, the set questions this week relate to the companies described in the case-studies set out in [26-001]-[26-080] of CACL (see pages 565-569 of the 2016 edition). For some of the questions you need to be familiar with the information on those pages in order to answer the questions.

1. The directors of Blue Mine Pty Ltd are Mr Chester and Ms Wu. Blue Mine has not held a board meeting for several months. At a recent GML board meeting, it was resolved to reduce production at Blue Mine by 10%. Mr Boon, the managing director of GML, instructed the mine manager at Blue Mine to make the reduction and she did. In these circumstances, could GML itself be considered a director of Blue Mine?
- CACL Problem Set 5 [26-300]: Question 3

2. JV Mine Pty Ltd is 50% owned by GML. In 2009, GML was approached by QMNE Ltd, the only other shareholder in JV Mine, to make a further major investment in JV Mine, to enable it to develop a new copper mine. The then directors of GML delegated to others, including a geologist, the task of obtaining the technical information about the amount of copper that might be able to be mined. The report prepared for the directors indicates that the proposed investment in the mine should be very successful. Queried by his fellow directors about the optimistic forecasts, Mr Chester (who has a geology qualification) assures them that all appears to be in order. However, some of the information has been negligently prepared. This means that, when the directors rely on the report and invest GML's funds in the mine, the investment turns out to be much less successful than the report anticipated. Have the directors of GML (or any of the directors) breached their duty of care?
- Adapted from CACL Problem Set 6 [26-350]: Question 2

3. Once the problems with JV Mine become apparent, GML's advisers prepare a draft notice to be sent to the ASX in compliance with GML's continuous disclosure obligations under ASX Listing Rule 3.1. The notice states that disappointing results at the JV Mine site are not expected to negatively affect GML's financial position compared to the previous year, because of positive results at other mines owned by GML. In fact, this is not correct, and this would have been apparent from a careful reading of the monthly management accounts and projections. The directors of GML say that they never saw the draft notice and, if they had seen it, they would not have approved it. However the board minutes suggest that the directors saw and approved the notice. It was sent to the ASX immediately after the board meeting. Have the directors breached their duty of care?
- Adapted from CACL Problem Set 6 [26-350] Question 4

4. JV Mine Pty Ltd has four directors: Addis, Boon and two nominees of QMNE Ltd, the company that owns the other 50% of the issued shares in JV Mines. In 2011, the mine operated by JV Mine was hit by severe flooding and ceased production for several months. The chief operating officer of JV Mine sent a report to its directors explaining that there were cash flow difficulties, that copper prices were dropping, and that the prospects of JV Mine raising further capital by borrowing or further equity injections from GML or QMNE, were limited. At a board meeting attended by Boon and the two QMNE nominees, the directors resolve to enter into an agreement with a German engineering firm to acquire a new drill. They believe the new drill will improve efficiency at the mine and return it to profitability. Addis is away on holidays and does not attend the meeting. After the meeting a contract is signed with the German firm to purchase the drill. Have the directors (or any of them) breached their statutory duty to prevent insolvent trading by JV Mine?
- Adapted from CACL Problem Set 6 [26-350]: Question 5