The Exclusive Emerald Gems Bankruptcy Case
Introduction
Exclusive Emerald Gems is an Australian company that went bankrupt due to the impossibility of fulfilling its obligations. The five directors of the company were unable to act together in the interests of the business; some of them were not competent enough. The company’s failure occurred due to two factors: a risky large loan that did not match the possible profit and the inconsistent adoption of critical decisions.
Liability of the Exclusive Emerald Gems Directors
Illiterate management and unequal distribution of responsibility among the five directors led to the bankruptcy of Exclusive Emerald Gems (EEG). According to the Company Law, EEG is a private company where shareholders have limited legal responsibility for the company’s debts (Chapple et al., 2020). However, all company directors are responsible for making joint decisions regarding the organisation’s development and failed in their fidutiory duty as directors. Section 141 of the Corporations Act discusses replaceable corporate rules, including voting procedures (CNA, 2001d). In the EEG, the voting order is based on the majority vote principle. However, only two votes were in favour of expanding the business, two were not present at the meeting, and one vote abstained. Despite the differences, the decision was made, and everyone will bear equal responsibility for it.
A director’s responsibility under the Corporations Act relates to conformity with the necessary personal qualities and standards of conduct. The Corporations Act Section 1.5.5 requires directors to act prudently, not to abuse their position, to avoid insolvency and misuse of information (CNA, 2001b). In the EEG example, these provisions were significantly violated. The directors decided to take out a loan without considering the risks and the possibility of its further coverage through sales. Blake acted in his self-interests, as part of the loan will be used buy from James Pty Ltd, warehouse and showroom where Blake was a shareholder. Blake abused his position and used the client database to his advantage. The discrepancy between the areas of directorial responsibility led the EEG to bankruptcy.
All five directors of the company are responsible for its insolvency. The director is elected to conduct business and represent the company’s interests (CNA, 2001a). All five directors acted in their interests, which conflicted with the company’s. Emma was not present at the company’s expansion meeting and made an important decision without knowing the consequences; her vote became decisive. Dana abstained from voting, thereby not taking part in deciding the organisation’s fate. Carlos did not insist on his participation in the decision, and his partners did not consider his opinion. The only people in favour of expansion and lending were Aaron and Blake. Aaron could not avoid a conflict with a supplier, losing a valuable collaboration. Blake, acting in selfish interests, stole clients from the EEG’s base. Thus, none of the directors met the required level of responsibility.
Possible Defenses and Their Success
The EEG director protection strategy must rely on the ignorance of the actions of one of the directors and the subsequent bankruptcy. Directors are expected to have the necessary experience and skills to perform their duties in good faith. The directors of the EEG did not meet this requirement, did not avoid conflicts and acted in their interests. Despite the fact that all five directors did not meet their official obligations, Blake is a lawbreaker.
Not all actions of directors that led to negative consequences are considered direct violations of the Corporations Act from the point of view of the law. All directors except Blake can adhere to this concept. The basis of the defence strategy will be the conviction that there was no self-interest in the decisions made, referring to section 181 of the Corporations Act (CAN, 2001c). Since the decision to expand and lend was made for the long-term development of the business, it can be appealed that the directors acted in the organisation’s interests. With the situation of Blake acting in his interests, it is impossible to prove the absence of selfish motives. It is, therefore, necessary to mention that the other directors were unaware of his use of the client base.
EEG directors can rely on the fact that their decision was balanced and informed, and their intentions were sincere. If the company has calculated the risks and payback, this strategy can be pretty successful. There is no information in the text on which data decisions on expansion and lending were made. Perhaps the leadership strategy could have been successful if not for Blake’s illegal activities. If the EEG had expert advice, the directors could justify the company’s actions by trusting the opinion of professionals. The directors are expected to conduct complex examination before making a pivotal decision.
Appealing to the trust of the management team can be a reasonably successful strategy. Not all directors were competent enough to make decisions about lending and the cost-benefit implications. For example, Emma may defend herself because she asked for advice from the more competent Aaron and Blake, there was little independence in her actions. Unfortunately, the argument in the EEG case regarding the innocence of Blake is not convincing enough. Carlos may have a winning strategy if he spent most of his time in the hospital and did not directly participate in activities. Blake’s guilt can be proved if the other directors provide evidence of their ignorance of his running a parallel business. The directors will not be held criminally liable for the company’s debts, however, it is necessary to prove Blake’s direct involvement in the EEG bankruptcy.
Conclusion
Failure to comply with the requirements for directors’ obligations prescribed in the Corporations Act led to the bankruptcy of EEG. None of the five directors proved to be competent enough to lead the organisation out of the crisis. Ignorance and self-interest are the main violations of official duties. The EEG director protection strategy may rely on undue trust in more senior team members or an expert council. However, this protection strategy may not be successful and all the directors will face the consequences of their decisions.
References
Chapple, E., James, N., Wong, A., Baumfield, R., Copp R., Cunningham, R., Kamalnath, A., Watson, K., & Harpur, P. (2020). Business and company law. Web.
John Wiley & Sons. Commonwealth Numbered Acts. (2001a). Corporations Act 2001 – Sect 180 Care and diligence – civil obligation only.
Commonwealth Numbered Acts. (2001b). Corporations Act 2001 – Sect 1.5.5 Company directors and company secretaries. Www5.Austlii.edu.au.
Commonwealth Numbered Acts. (2001c). Corporations Act 2001 – Sect 181 Good faith–civil obligations.
Commonwealth Numbered Acts. (2001d). Corporations Act 2001 – Sect 141 Table of replaceable rules. Www5.Austlii.edu.au.