Corporate Law

Purpose

To enable you to consider and research a topic of current interest of relevance to Australian corporate law.

It is important for you to take time to think through how to structure and present arguments and to review and discuss what the law is or should be in a particular area. Whilst discussion with others is encouraged, the final piece of work must be your own.

Assignment fact situation

Fruut Pty. Ltd. owns an orchard and also grows and sells young fruit trees. Rik and Patel are directors and shareholders. There are another six shareholders who have committed money to the business but take no part in decisions. Rik manages the day-to-day financial operations. Patel, who has no tertiary qualifications, is in charge of the orchard and growing the fruit trees for sale. Lana is Rik's girlfriend and is a qualified accountant. Although not named as a Director she often attends Board meetings to help the others with difficult decisions. She has also provided a guarantee to the Bank for a loan to the business.

Until recently Fruut had been very profitable. However, six months ago a competing business opened nearby and profits have fallen. Rik thinks that Fruut should move. He starts looking for new premises and decides the first place (owned by Watel Pty Ltd) he sees is perfect. It is an old shop, located at the front of a large block of land with excellent soil. Although the rental is quite high there is not another business selling trees nearby. He thinks they could serve coffee in the shop area and grow and sell fruit trees out the back. Without talking to anyone else, Rik signs a lease for three years.

Rik calls a board meeting and tells Patel and Lana that moving will solve all the company's problems. He says they will need to spend some money to fit out the old shop so they can serve coffee; and also to complete some work at the back and plant the fruit trees. Patel and Lana cannot think of any questions to ask, although Lana feels that Rik should not have signed the lease without them all having a chance to think about it.

The shop alterations are completed, Fruut moves to the new premises and staff are employed to run the coffee side of the business. The company had to borrow more money from Bank for this purpose. Business in the coffee shop is slow following a worldwide shortage of coffee beans caused by a disease affecting coffee plantations. In addition, there is a drought and Fruut's trees are not looking healthy. Potential customers are delaying the decision to buy fruit trees as water restrictions mean gardens (including trees) can only be watered occasionally. Even with the new coffee shop, sales have fallen below those obtained in the old premises.

Lana is worried that they have made a mistake moving.

REQUIRED: Complete task a. in A and task b. in B. Each task.

A. Assume you are invited by Lana to address a Board meeting to talk about options for the company. Lana asks you to talk about whether any of them may have breached their duties as directors.

a. Write an explanation in preparation for this meeting, setting out what the duties of directors are under s.180(1)of the Corporations Act, explaining the effect of s.180(2) and assessing whether any of the directors may have breached their duties under this section.

In your answer you should compare their situation to at least two cases you have studied.

AND

B

Now assume that Rik, Lana and Patel agree that their only solution to the money problems facing Fruut is to move back to the old premises that are still empty. Lana suggests that the new lease is unenforceable anyway as Rik signed it with his name rather than that of the company. The agent for Watel Pty Ltd objects, saying that the lease is perfectly valid and enforceable against Fruut.

b. Explain to Lana, Rik and Patel whether Fruut can be forced to keep leasing the new premises for the three year term. In your answer you should compare their situation to at least two cases you have studied.

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