Analysis of Termite Resources NL (in liq) v Meadows Case Study

This case study analyzes Termite Resources NL (in liq) v Meadows, a significant case in corporations law. The case involves a dispute over the breach of directors' duties by the former directors of Termite Resources. The liquidators initiated action against the directors, alleging breaches of sections 180 and 181 of the Corporations Act 2001 (Cth). The court examined the directors' responsibilities, particularly in relation to the company's solvency and financial reserves. The judgment emphasized the importance of considering creditors' interests and the risks associated with market volatility. The court found that the directors had breached their duties by failing to adequately assess and manage the company's financial position, leading to a compensation of 7 million dollars. The case highlights the piercing of the corporate veil and the accountability of directors and shareholders in closely held companies, providing a reminder of their fiduciary duties. The study also reviews directors' duties and situations where creditors' interest needs to be considered.

Running head: CORPORATIONS LAW
CORPORATIONS LAW
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Media Case study of Termite Resources NL (in liq) v Meadows, in the matter of Termite
Resources NL (in liq) (No 2) [2019] FCA 354.
Introduction:
The corporation is nothing but an artificial person having a separate legal entity distinct
from its members. However, directors, officers and shareholders are not. The directors represent
the will as well as mind of the company and they are behind the control and management of the
company (Hedges et al., 2016). This is because the company is just a legal and fictional character
existing in the eyes of the law. It has been the main objective of the corporate law to restrict the
powers given to the human agents of the company. In a company, the directors possess two types
of duties namely duty to care and fiduciary duty of good faith and loyalty (Nosworthy, 2016).
While the first category deals with tort of negligence under common law, the other category has
equitable approach similar to that of the agents and trustees (Hedges et al., 2016). The case of
Termite Resources NL (in liq) v Meadows provides a reminder to the directors of the company
about regarding their duties. Although it was decided by the Federal Court that the liquidators
could not establish proper amount of losses in its decision for which the court gave much lesser
amount of damages amounting 7 million dollars for insufficient cash.
Discussion:
The case was against the company directors regarding the amount of money reserved by
the company for meeting its liabilities which includes the Distribution Policy of the company.
Case involved an action initiated by the liquidators of the company against its six former
directors and the officers. It was alleged by Termite that there was breach of duties under
sections 180, 181 of the Corporations Act 2001 (Cth) (Langford & Ramsay, 2015). On 12th

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March of 2013, 3 million dollar was designated by the company as its reserve retained. In the
beginning of the year of 2014, there happened a sudden fall of the spot cost of iron ore due to
which price reduced from 130 dollar per ton to about 100 dollar per ton. Due to thus, Termite
incurred tail liabilities amounting to 25 million dollars. As a result iron ore production reduced.
On June 18 of 2014, it was revealed that this amount was inadequate for which the company was
subjected to voluntary administration (Brotchie & Morrison, 2017). During voluntary
administration, the iron ore spot price was continuously falling down to about 80 $ per ton.
Finally in September 2014, the Termite creditors caused winding up of the company.
The main question in the case was whether the managerial, strategic and primary
decisions taken by Termite Resources NL were actually taken by the Board of its holding
company called Outback Iron Pty Ltd, in such situation Board directors will be also made liable
like the Termite directors for breaching their duties as provided under the said Act.
The Federal Court discovered that the directors belonging to Outback were considered
deemed directors of Termite as per the Act and they also possessed statutory duties towards
Termite as the decision- making locus for Termite was on the basis of the agreement between the
parties and the shareholders and also on the parties’ conduct (Tiba, 2019). The court decided
against the defendant directors of Termite such that each of them had breached their duties. It
was ordered by Justice White that Termite must be given compensation of 7 million dollar by the
directors for their breach of the duties.
The case critically examined the scope and ambit of the duties of the directors u/s 180,
181 of the Act and also under common law principle. It was decided that it is significant to
consider matters which controls solvency of a company. The following matters were found by

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Justice White as the risks that can be foreseen in relation to solvency of Termite; volatility as
well as fluctuations present in the price of iron ore, fluctuation rate of USD/AUD exchange and
uncertainty for project. The Court found that the directors have a duty of considering the
creditors’ interest to determine the course of action when there lies a real and immediate risk of
insolvency of the company.
Further evidence was given during the trial for establishing that 3 million cash reserve
was not enough as by this Termite will not be able to meet its liabilities. It was further alleged
that the directors if acting with diligence would not have allowed a Distribution Policy having
cash reserve less than 10 million dollars. It was crystal clear that the undertaking of Distribution
policy was not in the interest of Termite. This showed that the directors did not use the Best
Judgment rule enumerated under section 180(2) of the Act that can directors from their
liabilities. The directors further were liable for breaching their duties as they failed to conduct a
serious research and proper analysis of the case reserve and not keeping themselves well
informed about the adequacy.
Conclusion:
Thus it was seen that the separated legal entity of the company due to its corporate veil as
held in the case of Salomon v Salomon & Co. Ltd (1897) A.C., 22 was pierced and the directors
were made liable because of the breach of their duties. However these are quite common in the
private companies that are closely held. The decision of the court in this case provides a stringent
reminder that the shareholders of this type of companies who want to control or make all the
important decisions of the company or its directors can be considered as the officers or even
directors of such and they also have duties towards the company. In such situation, if the

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company is subjected to liquidation, then the liquidators can claim damages for breach of duties
from those directors or shareholders. The decision of the case further provides a critical review
of the duties of the directors and also provides the situations in which the directors are needed to
consider the creditors’ interest.

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References:
Brotchie, J., & Morrison, D. (2017). Insolvent trading and voluntary administration in Australia:
economic winners and losers?. Accounting & Finance.
Corporations Act 2001 (Cth)
Hedges, J., Bird, H. L., Gilligan, G., Godwin, A., & Ramsay, I. (2016). An Empirical Analysis of
Public Enforcement of Directors’ Duties in Australia: Preliminary Findings. CIFR Paper,
(105).
Hedges, J., Bird, H., Gilligan, G., Godwin, A., & Ramsay, I. (2016). The policy and practice of
enforcement of directors' duties by statutory agencies in Australia: An empirical
analysis. Melb. UL Rev., 40, 905.
Langford, R. T., & Ramsay, I. (2015). Directors' Duty to Act in the Interests of the Company:
Subjective or Objective?. Journal of Business Law, 173-182.
Nosworthy, B. (2016). A directors' fiduciary duty of disclosure: The case (s)
against. UNSWLJ, 39, 1389.
Salomon v Salomon & Co. Ltd (1897) A.C., 22
Tiba, F. (2019). Safe Harbor Carve-out for Directors for Insolvent Trading Liability in Australia
and Its Implications. USFL Rev., 53, 43.