What circumstances must be disclosed by a director negotiating a contract? (Aus)

Patrick Bracher, Norton Rose Fulbright

The insured company represented by its sole director and shareholder agreed to construct a residential aged care building on the property.  The company failed to disclose at a material time that the company was in severe financial distress and unable to meet its obligations including tax obligations. The Australian Federal Court held that the failure to disclose this situation to the other contracting party was a breach of the director’s duties under the Australian Corporations Act requiring directors to “exercise their powers and discharge their duties with the degree of care and diligence that a reasonable person would exercise” as a director of the company.  The statutory obligations create an objective standard by reference to the company’s circumstances and the director’s responsibilities.

The distress of the company was the substantial reason why the work under building project was not properly progressed.  The company was suffering severe financial distress and unable to complete the project in a timely fashion.  This was fundamentally important information that the director should have disclosed under his obligations in terms of the Corporations Act, whether the failure was deliberate of not.  Had the director done so, a replacement builder would have been appointed within about a month and the project would have been completed within a reasonable time to avoid loss of the other party.

Hakea Holdings (Pty) Ltd v McGrath (No 2) [2022] FCA995 (Federal Court of Australia)

First published by: Financial Institutions Legal Snapshot