Advise asic of the liability of each of the three director

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Reference no: EM133474617

Sarah, Liam and Mette operate "Diamonds Are Forever Ltd" (DAF) which enables wealthy investors to invest in Australian pink conflict-free diamonds.

The board of directors is composed of the following directors:

Sarah is the company's managing director;
Liam is an executive director and a former jeweller; and
Mette is Ne company's non-executive director and its diamond-grading
expert. She has worked in the diamond industry for 30 years.

DAF's board has discovered that the mine which produces the pink diamonds will close in a few months due to low yields. Recently the board saw a media report about green diamonds being found in a South Australian mine. Sarah and Liam are excited about the possibility of expanding the business to include green diamonds, as they are very concerned that their supply of pink diamonds is almost exhausted. Sarah and Liam ask Mette to investigate the quality of the green diamonds.

Mette phones a world-leading diamond-grader for advice. He tells Mette that the

'Green diamonds' are actually green sapphires, a much cheaper and inferior gemstone, and much less desirable than real diamonds. Mette discusses her findings with the DAF's board. Liam and Sarah are not pleased to hear that the 'green diamonds' are actually green sapphires. They are desperate to find a replacement for pink diamonds to keep DAF operating. Mette advises that if they

want to provide the new gems for investment, the company must market them as

green sapphires. Liam disagrees and believes that DAF could market the gems as

'green diamonds' because their clients are so trusting of DAF's great reputation. Sarah agrees with Liam. Mette realises that the other two will not agree with her, so she resigns as a director of DAF immediately.

Sarah and Liam proceed to expand DAF's business into 'green diamonds' with their

marketing campaign falsely calling the new green gems 'diamonds'. They buy

$1 million worth of 'green diamonds' paying $500,000 upfront, with the remainder to be paid within six months. Many wealthy buyers decide to buy 'green diamonds' from DAF. However, one month later the public media reports that the 'green diamonds' are actually a scam and not real diamonds. This results in bad publicity for DAF and terrible outcomes: the clients who bought the gemstones demand a refund and the company cannot attract new clients. It now cannot pay the remaining $500,000 of debt, nor can it pay its other debts, and those creditors are threatening to sue DAF for those unpaid debt.

Advise ASIC of the liability of each of the three directors for breaching their duties under the Corporations Act 2001 (Cth). What penalties could they face?

Reference no: EM133474617

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