Reference no: EM131792693

Use Australia Corporation Act 2001 as reference

XYZ Learning Centres Ltd (XYZ), a small ASX listed company, owned and operated a large number of child care centres. Eddie was the company's chief executive officer and managing director. Prior to this, he had many years' experience as chief administrator of a large public children's hospital in Sydney. James, a director and the company's chief financial officer, has accounting qualifications and a PhD in finance. XYZ's other directors, Bill, Carol and Des, are non-executive directors and merely attend the monthly board and audit committee meetings. Bill and Carol are both doctors and have been appointed to the board to provide expert medical and dietary advice. Des is a partner in a large firm of chartered accountants and is the chair of the board's audit committee. Bill and Carol are the other members of the audit committee.

At a recent board meeting attended by all the directors, except for Bill, a long-term multi-million dollar contract with Go-Foods Pty Ltd (Go-Foods) to supply and deliver nutritious cooked meals to XYZ was discussed. At the time, Carol and Des were unaware that Go-Foods' prices were extremely high. While Carol was also unaware that Eddie's family company owned 35% of Go-Foods' shares, Des suspected (but was not certain) that Eddie had a financial interest in Go-Foods but did not mention his suspicions to the other directors. At this meeting, James reported to the board on the level of the company's current liabilities. He informed the board that XYZ had significant short-term loans that needed to be either repaid within the year or refinanced.

A decision about the long-term multi-million dollar contract was deferred to the next board meeting and James was asked to prepare a report on the financial impact of the contract for the company. A number of matters were considered at this subsequent board meeting, which was attended by all the directors. First, James' inadequate but favourable report on the financial impact of the contract was accepted without discussion and the board passed a resolution that XYZ should enter into the contract. Secondly, the board considered the company's draft annual financial statements prepared by the company's accounting staff under James' supervision. After the board's audit committee recommended the adoption of the draft financial statements, the directors, without further discussion, formally resolved that the financial statements complied with applicable accounting standards and presented a true and fair view of the company's financial position. None of the directors noticed that the financial statements mistakenly classified $500 million in debt as non-current liabilities. The financial statements with the incorrectly classified non-current liabilities were then submitted to the ASX in accordance with XYZ's continuous disclosure obligations under the corporations legislation.

(a) Consider the position of each of the XYZ directors and advise whether they breached any of their duties under the Corporations Act 2001 (Cth). In particular, advise whether they breached their duty of care in the above circumstances.

(b) Can the directors rely on the business judgment rule?