Business Law Assignment: Dick Smith Directors' Duty of Care Case

This case study examines the Dick Smith case, focusing on the alleged breach of directorial duty by the company's directors. The assignment analyzes the failure to exercise reasonable care and diligence, particularly in managing supplier rebates and inventory, which led to significant financial losses. The study references relevant laws, including Section 180(1) of the Corporations Act, and key cases like ASIC v Healey and Daniels v Anderson, to illustrate the legal obligations of directors. The assignment highlights the importance of understanding financial statements and the objective ‘reasonable person’ test in assessing a director's duty of care. The case underscores the legal consequences of inadequate management and the importance of fulfilling statutory obligations in business operations.

Running head: BUSINESS LAW ASSIGNMENT
Business law Assignment
Name of the Student
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Author Note

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The Sydney Morning Herald, March 20, 2017
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.

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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.

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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.