Corporate Law Case Studies 

Question 1: Designco Pty ltd designs, manufactures and distributes craft kits for children. Children use the kits to construct balsa wood models of animals, which can be painted. The directors of the company are Ian and May. Ian and May are also the only shareholders. Both Ian and May work in the business. Ian is in charge of design and marketing and May looks after manufacturing and finance.

Among other assets, Designco owns the original design drawings done by Ian. The commercial value of the drawings is about $15,000. Unfortunately, the business has not been going well lately. Ian is worried that, if Designco fails, the drawings will end up in the hands of the liquidator. He and May pass a directors’ resolution donating the drawings to the Art Gallery. Have the directors contravened any director duties of the Corporations Act and the corresponding fiduciary duty? 

Question 2 : Andrew and Belinda are the only shareholders and directors of Sailors Pty Ltd which sells boating equipment. The company owns a warehouse and attached shop and a large block of land on the waterfront which it uses for storage. Andrew is also Chairman and majority shareholder of Buildplus Pty Ltd which is a property developer. Buildplus needs to borrow $1.5 million to fund its latest land purchase but it has no assets to use as security for the loan. Andrew arranges for Sailors to guarantee Buildplus’s loan by getting the company to execute a mortgage over its waterfront land. Andrew signed the mortgage documents as a director of Sailors and forged Belinda’s signature as the other signatory. Cassie who is the manager of the bank knew that Sailors was not in the business of land development. However she was away at the time the documents and the transaction were organized and signed. The bank employee in charge in place of Cassie was unaware of Sailors corporate history and did not ask any questions. Builplus is now in default on the loan and the bank is seeking to enforce its rights against Sailors. Advise Sailors whether it is bound by the mortgage.