Problem
Driving Holidays Ltd owns several car hire outlets across the Waikato region. Five years ago, it borrowed a substantial amount of money in order to fund an expansion into Tauranga. Although the directors were confident they would be able to repay the loan within 5 years, they negotiated an additional option that would allow them a 2-year extension if necessary. This option would need to be exercised six months prior to the expiry date.
Initially, the expansion went very well, and Driving Holidays opened 2 new outlets in Tauranga. In the last two years, however, business has dropped sharply, and both the Tauranga outlets are now operating at a loss.
Driving Holidays' board consists of 4 directors. Two of the directors are non-executive directors who have minimal involvement in the company and rely heavily on the two executive directors to make decisions. The executive directors focussed predominantly on the original outlets and paid little attention to the new outlets in Tauranga. Board meetings were held irregularly and at those meetings the directors paid little attention to the financial reports believing if there were any big issues the accountants would draw their attention to them. As a result, they did not realise how much the new outlets were losing. Further, they have now missed the deadline for extending the loan and the lender will offer no additional extensions.
In order to cover the loan, Driving Holidays must now sell both of their outlets in Tauranga plus two of their original outlets. The shareholders are angry at the directors and want to take legal action for their mismanagement.
• Using legislation and cases, explain to the shareholders whether the directors may be liable for any careless mismanagement and breach of s 137 of the Companies Act 1993.