COMPANY LAW ASSIGNMENT

Question 1 -

Smith Ltd is a listed company. Colin Ltd holds 45 per cent of the issued shares in Smith Ltd. Note Ltd holds 30 per cent of the shares. The remaining 25 per cent is held by a diverse group of shareholders.

Smith has tendered for the construction of a large timber mill and is likely to be the successful bidder. It will need an injection of funds to construct the mill. The directors are concerned that Colin Ltd, which also has other timber milling interests, will launch a takeover of Smith Ltd and they will lose their positions. They are also concerned that Colin Ltd will terminate the employment of many of workers now working for Smith Ltd. Indeed

Colin Ltd has a reputation of using foreign workers rather than local workers. At a board meeting the directors resolve to allot a substantial number of shares to Note Ltd in consideration for a promise that Note Ltd will arrange additional finance for the construction of the mill. The allotment to Note Ltd varies the shareholding power of Colin Ltd such that, after the allotment, Colin Ltd will only command 10 per cent of voting power.

Advise the directors about the possibility of any legal challenge to their actions under the Corporations Act 2001.

Question 2 -

The Timber Works Pty Limited (in liq) (the "Company") was wound up in December 2011. The Company conducted a family business with Jacob and his wife Marie as the sole Directors of the Company. Jacob and Marie were the sole Directors of the Company since its incorporation and were its Directors at the time the Company was wound up. Tania was employed by the Company as its Financial Officer, but was not a director of the Company.

The liquidator now seeks to recover from Jacob and Marie the sum of $600,000, being the amount which corresponds with the total of some debts incurred by the Company between 2010 and 2011. The liquidator alleges that when each of the debts were incurred the Company was insolvent.

Both Jacob and Marie allege that they had reasonable grounds to expect that the Company was solvent at the relevant time and that it would have remained solvent even if the Company had incurred those debts and any other debts at that time. In support of this contention Jacob and Marie state that throughout the relevant period the debts incurred and which would continue to be incurred by the Company could have been paid by recourse to the sale of the assets of the Company and that Jacob and Marie believed it was possible that those assets could have been sold over a 90 day period.

Further, Jacob and Marie state that they were advised by Tania during the relevant period that the Company was solvent and was able to meet its obligations because most of the creditors did not press for payment within the normal trading terms and because there was an understanding that the creditors would not take recovery action against the Company provided that the Company paid within a reasonable time after a 30 day notice was given. Tania says that she was never asked to monitor solvency and that her job was more akin to being a bookkeeper and that she did what she was told by Jacob and Marie.

Advise Jacob and Marie of their prospects of resisting the liquidator's action. Your answer should include an analysis of the essential elements (under s588G of the Corporations Act 2001) that are necessary to be shown by the liquidator to be successful and an analysis of any such defences (under S588H) that Jacob and Marie may have to any such application.