Reference no: EM132050493

Background facts:

BigData Pty Ltd (BigData) is in the business of installing wired and wireless networks including data cabling. Jess, Rui and Nathaniel are the company’s only shareholders, only directors and only employees. Jess is the managing director; Rui works in the office doing the bookkeeping and accounts; and Nathaniel works as a data electrician on the company’s jobs and supervises the company’s data cabling and installation work.

In December 2016, BigData is contracted to do some work for the University of Newcastle (UoN), which required updating the wired and wireless networks in a number of lecture theatres and auditoriums at the Callaghan campus. The contract value was $400,000 and it required BigData to spend approximately $250,000 on labour costs, cabling and hardware. Hence Big Data stood to make $150,000 profit on the deal. The work needed to be completed during the University’s Christmas shutdown period between 20 December 2016 and 5 January 2017. Because of the short time-frame, Jess arranged for some of the work on the University contract to be performed by Sparks Pty Ltd (Sparks), as a subcontractor.

In the contract with Sparks, Jess promised that BigData would pay Sparks $65,000 for the work on the University job by the end of January 2017. Jess agreed to the timeframe for payment to Sparks despite the fact that she knew the contract with the University provided for the $400,000 price to be paid in ten monthly instalments ($40,000 per instalment) commencing on 15 April 2017.

By December 2016, BigData was facing financial difficulties and debt repayments to several creditors were well overdue. In particular, BigData owed $100,000 to one supplier, CableCo Pty Ltd (CableCo), a data-cabling wholesaler that had been one of its major suppliers since 2008. By December 2016, this sum was well overdue despite repeated efforts by CableCo Pty Ltd to secure payment. In November 2016, CableCo refused to provide BigData with any further supplies on credit.

Jess asked Rui to find an alternative supplier of data cabling who would be prepared to extend them credit. Jess was unaware that Rui’s uncle had recently acquired a company in the Philippines that manufactured LAN and Ethernet cabling. Rui rang his uncle to enquire about the best deal that his company (4Data) could offer on supplies of cable for the University job. His uncle offered a price that was significantly less than the price per metre that they had been paying to CableCo. Rui told his uncle about CableCo’s price and they agreed that 4Data would charge BigData a higher prices (that was still less than CableCo) and that he and Rui would share this additional profit.

When Rui told Jess about the 4Data deal, she asked him to get an additional quote from another supplier and some information about the cabling’s technical specifications and the manufacturer’s quality control. Rui was worried that his uncle might lose the job if another supplier was also able to quote. He told his uncle who provided him with some bogus documentation for two fictitious competitors.

Rui tabled this information at the next board meeting. Jess was only interested in price, and was most interested in the quote from 4Data, which was (not surprisingly) the cheapest. Nathaniel was at the meeting but was distracted by some domestic problems he was having at the time and unfortunately, he did not closely read the technical information in the quotes that Rui had provided. If he had paid attention he would have quickly realised that the technical information supplied with the competitors’ quotes was false and he should also have realised that 4Data’s cabling was of inferior quality to the cabling that had been supplied by CableCo. The directors all agreed to order their cabling supplies on credit from 4Data. The inferior cabling was used at the University.

In early January 2017, a representative of CableCo visited BigData’s office and advised Jess it was seriously considering legal proceedings to recover the outstanding debt. Nathaniel overheard this conversation and found it very worrying. A week later Nathaniel called a board meeting in which he proposed putting BigData into voluntary administration. Jess argued strongly against the proposed resolution. She told Rui and Nathaniel she thought CableCo was bluffing and that in any case BigData would be able to pay off the debt to CableCo over time, as the payments under the University contract came through. Jess promised Rui and Nathaniel that if BigData’s financial position became more difficult she would personally lend enough money to the company to allow it to pay its debt repayments as they fell due. Jess did not check the state of her personal finances before making this promise. Rui was easily persuaded by Jess’s arguments and together they voted against Nathaniel’s resolution.

In February 2017, CableCo’s lawyers wrote to BigData, issuing a statutory demand for payment of the debt. At this point Jess discovered that her personal investments had suffered a significant and unexpected slump back in November and that there was little prospect of them recovering their former value any time soon, if at all. She told Rui and Nathaniel that because of this change in her personal financial situation she was “no longer willing to risk my own funds to save BigData”. On 2 April 2017, CableCo filed an application for the winding up of BigData and the court issued the winding up order on 27 July 2017. In August, UoN denied liability for the remainder of its debt to BigData, claiming that the cabling was of inferior quality and not ‘fit for purpose’. UoN commenced proceedings against BigData for compensation. (NB. this claim is likely to be covered by BigData’s public liability insurance and is not relevant to the issues raised below except in relation to the claim of negligence).

On 6 September 2017, the newly appointed liquidator of BigData comes to see you for legal advice. A liquidator is required to report to ASIC under s533 Corporations Act if it appears to the liquidator that the directors have breached the Corporations Act. The liquidator may also bring proceedings against all or any of the directors for breach of director’s duties seeking compensation on behalf of the company (if it is in the best interests of its creditors). Given these facts and your knowledge of the relevant law, you are required to advise the liquidator on each of the following issues:

What are the likely chances of ASIC (or the liquidator) succeeding in an action against all or any of the directors for negligence? What facts and law (cases and sections of the Corporations Act) will ASIC or the liquidator rely on? Can any of the directors use the business judgement rule? What other defences are available to any of the directors?