Question 1

Pump Up Max & Co is a leading fitness chain in Australia. It is listed on the ASX and has a massive capital base, with more than 1,000 employees around Australia. The directors of the company are well known figures in Australia, and all have held important positions in companies before joining Pump Up Max & Co as directors.

Recently, in a daring business venture of expansion, the company bought out a substantial amount of small and medium sized fitness centres for considerable amounts in the states of Victoria, New South Wales and Queensland. Before the said venture took place, the directors were given considerable amount of information on each of the restaurants prior to their purchase. There were many discussions and meeting at the board level. These were then followed up by some serious investigations being carried out by financial experts hired by Pump Up Max & Co before the final deal was sealed.

The good time of the company was short-lived when the Covid-19 pandemic hit, which triggered a series of lockdown and movement control order that crippled the fitness industry. It now transpires that the company paid too much for the various companies they acquired. The purchase has resulted in a significant outflow of capital for what now appears to be poorly performing companies. The purchase of the companies was a bad decision now that the financials come to light. There is quite some discontent from the shareholders who have seen the value of their shares plummet. These shareholders believed Pump Up Max & Co shouldn’t have been that ambitious in that particular venture of expansion.

a).What might be the liability of the directors for the purchase of the fitness centre, a decision which now appears to have been a bad decision for the company? Your answer should include what directors’ duties are involved in this matter and the relevant sections of the Corporations Act regarding these directors’ duties. (9 marks)

b).What defence(s) are available to the directors for what turns out to be not a good business decision? Discuss on the justification on the defence(s) available. (6 marks)

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