Problem
Charlotte, Harrold and Boris are the executive directors of Quick Products Pty Ltd. Charlotte is the Managing Director. Harrold is the Chief Financial Officer. Margaret and Kate are nonexecutive directors of the company.
• At the end-of-year Board meeting, the directors meet to approve the annual report for release to shareholders. Harrold presents the financial reports for the approval of the directors and the reports are examined by the directors.
• Margaret notices that there seems to be an error in the Balance Sheet. The 15-year mortgage is recorded as a Long-term liability. Margaret is aware that the mortgage is to be repaid on 30 September of the coming year and is therefore a Short-term liability. She raises the matter at the meeting, but Harrold advises that it is still a mortgage and is to be classified as Long-term. Margaret and the other directors accept Harrold's explanation. They sign off on the report and it is released.
• Shareholders are misled by the error and pay high prices for the shares. When the mortgage is to be repaid on 30th September, the company has to borrow funds and enters into a further short-term loan. The company's cash flow falls. It is unable to pay its debts and creditors move to appoint a liquidator.
• Share prices drop and shareholders and creditors begin an action for breach of director's duties.
• As a non-executive director, Margaret believes she should not be responsible for the breach of director's duty. She seeks your advice
Task
Using the IRAC method to advise Margaret whether she and the other non-executive directors would escape responsibility for breach of duty.