Three years ago, Tim Joiner was appointed by Statewide Timber Merchants as Managing Director. When his previous employer, Mary from Federal Joinery Ltd, heard Tim had applied for the Statewide job, she wrote to Lee, the Chairwoman of Statewide, to warn the Board of Tim's tendency to overstate his competence and experience, and to place his own interests first. However, the Board was so impressed with Tim in the interview, Lee decided not to tell the others of Mary's warning, instead dismissing it as Mary's annoyance at losing a valuable staff member.
When appointed, Tim was instructed by the Board to enforce the company's credit policy and to make no exceptions. The policy required full payment within 60 days for materials supplied to customers. In addition there was a cap of $5000 on the credit that could be advanced. This meant that if a customer wanted to purchase more than $5000 of materials, any balance over $5000 had to be paid before delivery of the timber. This policy came about because a recent downturn in the building industry has resulted in a decline in turnover for the company and the Board is concerned that the bad debts will increase. Legal actions taken to recover outstanding amounts have been costly and not always successful.
As Managing Director, Tim is the line manager for the company's Financial Controller and for the Operations Manager. While the Financial Controller is responsible for the financial activities, cash flow and recording functions (including the credit policy), the Operations Manager is responsible for all aspects of processing of the timber sold by Statewide, including seasoning, cutting, treating and storing. Treatment is a crucial part of the operations due to major problems with termites invading and destroying houses made with timber that has not been treated. Due to a malfunction in the factory, for two weeks timber was not properly treated but was sent to customers anyway (a total of $400,000 worth of timber).
When Tim heard rumours that this had happened (well after the two weeks were up), he decided to ignore it - he was too busy arguing with the Financial Controller over the credit policy. Tim insists that it is essential for the company to keep supplying customers who have not paid in 60 days - they should be given 120 days to pay. He also insists that those having trouble paying should be allowed to purchase up to $10,000 of timber before being refused further credit. When the Financial Controller protests, Tim threatens to sack him.
Tim is also distracted at present. He runs his own company, Best Homes Pty Ltd that purchases timber from Statewide. The Directors of Statewide do not know of this business interest. Best Homes is having problems meeting its debts, including one with Statewide for $10,000. He has decided, however, that it is important to keep trading and to hope things improve.
Yesterday, the Board of Directors for Statewide held an urgent meeting. At the meeting they were told by the Financial Controller of the changes to the credit policy and by the Operations Manager about the treatment problems. Potentially, Statewide could be liable for damages of up to $2.5 million for termite damage to new houses. Furthermore, bad debts have ballooned out to $1.8 million.
Required: Outline and discuss the potential legal liability of all those involved in this scenario. In your answer, refer to case law and statutory provisions. Also, identify any defences available and the likely success of those defences.