Reference no: EM133472769

YEM Ltd is the owner of a number of Health Centres in Victoria. The board of YEM Ltd is made up of 5 persons including Jack Askland, the managing director and chief executive. The other directors include the finance executive (Hoadley) and 3 non-executive independent directors.

At a recent board meeting attended by all the directors, a 5 year $8.5m contract with HPL Ltd, to supply important equipment to YEM Ltd was discussed. At the time, Askland's family company owned 38% of the shares in HPL Ltd. Barnes, one of the non-executive directors suspected that Askland might have an interest in HPL Ltd and would as a result benefit from the contract; but he did not share this suspicion with the other directors because he thought it would embarrass Askland.

At the same meeting, the finance executive (Hoadley) reported to that the level of the company's current liabilities was higher than at the end of the previous accounting period and that there were significant short term loans needing to be refinanced if they could not be repaid.

A decision about the contract with HLP Ltd was deferred to the next month's board meeting and the finance executive was requested to prepare a report on the financial impact of the contract.

At the following board meeting, the finance executive's report which favoured entering into the contract was received and accepted without question or discussion. It was resolved that the contract should be entered into.

The board also considered the draft annual financial statements prepared under the finance executive's supervision. The audit committee had recommended the adoption of the draft financial statements and the directors, without further discussion, resolved pursuant to s 295(4)c of the Corporations Act that the financial statements complied with the relevant accounting standards and presented a true and fair view of the company's financial position. None of the directors noticed that the financial statements incorrectly classified a $50 million debt as a non-current liability. The financial statements were subsequently submitted to the ASX in accordance with the continuous disclosure obligation.

It later became clear that the decision to enter the contract with HLP Ltd was a poor one from the point of view of YEM Ltd (but very beneficial for HLP Ltd). In addition the mistake in the financial statements severely impacted YEM Ltd's ability to meet its debts as and when due and although the board had a subsequent meeting to address this, it limited the company's ability to borrow and grow as planned.

1. In the context of the board decision to approve entering the contract with HPL Ltd, advise whether the non-executive directors might be in breach of s 180 of the Corporations Act by failing to exercise the degree of care and diligence a reasonable person would exercise if they were a director of DCL Ltd. Cite your sources.

2. Can any of the directors or officers of DCL Ltd rely upon the business judgment rule in their approval of the contract? Give your reasons.

3. Did the directors of DCL Ltd act in accordance with their duties in resolving that the financial statements presented a true and fair view of the company's financial position? Explain and cite your sources.