Business Law for Dick Smith

The Sydney Morning Herald, March 20, 2017 The Directors and the Executives of Dick Smith have been accused of mitting a breach of their directorial duty to exercise reasonable care after the pany has suffered financial collapse in January 2016. The former directors of the Dick Smith had to face legal action 14 months after the electronics chain was put into administration. Receiver brought a legal action against the directors and executives to recover losses worth $60 million as the directors failed to exercise reasonable standard of care and skill managing the pany’s inventory. The pany was alleged that its inventory purchasing decisions are based on maximizing rebates instead of demand of the customers which led to an increase in the redundant stock amounting to $180 million by October 2015. The excessive stock led the pany write off $60 million of inventory in November 2015. The directors were accused of inflating profits artificially in the 2015 financial year, as they were recoding rebates as profit. Although the directors denied that they made the purchasing decisions based on rebates, the chief financial officer of the pany admitted in court that the pany did adopt a strategy to enhance the earnings from rebates. The law firm defending the directors contended that the directors have always acted diligently, consciously and exercised reasonable care while carrying out the business operation of the pany. The issue that arises in the Dick Smiths case is that the directors have failed to exercise their statutory duty to exercise due care and diligence while carrying out the business operations of the pany. According to Section 180 (1) of the Corporations Act (Cth) a director was required to act with reasonable care and diligence. Under general law, whether a director had mitted a breach of his directorial duties is subject to the subjective assessment and depends largely on the director’s own knowledge and skill (Velasco 2014). However, in Re City Equitable [1925] the rule, the court held that in order to determine whether a director has violated his directorial duties, the objective test shall be applied where the director must establish that he has exercised reasonable care and diligence and had not mitted a breach of his duties. In Dick Smith’s case, the directors and the executives were alleged to have failed to place adequate systems to manage the supplier rebates and inventory of the pany. In ASIC v Healey [2011], the court held that the directors of the pany are under statutory obligation to be able to read and prehend the financial statements of the pany instead of simply relying on the fact that the systems are in place. Further, in Daniels v Anderson [1995], the Court of Appeal held that directors must prehend the nature of the duty that they are statutorily obligated to perform. Section 180 (1) of the Act further requires to impose an objective ‘reasonable person’ test in order to determine whether the director has exhibited hid duty of care and diligence in the manner as any reasonable person would exhibit under similar circumstances. ASIC v Healey & Ors [2011] FCA 717 JWS Daniels v Anderson [1995] 37 nswlr 438 Re City Equitable Fire Insurance Co [1925] Ch 407 Velasco, J., 2014. A Defense of the Corporate Law Duty of Care.