The Directors and the Executives of Dick Smith have been accused of committing a breach of their directorial duty to exercise reasonable care after the company 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 company’s inventory. The company 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 company 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 company admitted in court that the company 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 company.

Issues in the article

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 company.

Relevant laws

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 committed 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 committed 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 company. In ASIC v Healey [2011], the court held that the directors of the company are under statutory obligation to be able to read and comprehend the financial statements of the company 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 comprehend 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.

Reference List

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.