FOUNDATION OF COMPANY AND COMMERCIAL LAW FINAL EXAM: QUESTIONS

PART A- Problem Questions

Question 1 - Denise and Freda operate a busy café in Melbourne's inner east.  They have been running the business together for 5 years and share profits equally.

As the years progress, Denise and Freda notice that they do not have enough working capital to keep the café running.  Denise and Freda need to raise additional funds.  Also, due to the slippery floors, there have been some customers that keep falling over and breaking their legs.  Denise is really concerned about the liability for Denise and Freda.

Denise and Freda are approached by Bruno who makes the best cakes in Melbourne.  Bruno wants to work with Denise and Freda in the café as the head pastry chef.

Denise and Freda believe that if Bruno worked at the café then his expertise in cake making will bring in more business for the café. Denise and Freda come to visit your office and ask your legal advice to:

a) What type of legal business structure is Denise and Freda currently operating? Provides reasons.

b) Whether their current business structure is the most suitable for the café or whether they should consider another form of business structure, and, if so, which one?

Question 2 - The board of The Best Coffee Ltd (TBC Ltd), a large coffee bean company listed on the Australian Stock Exchange, comprised of four directors, three of whom are executive directors and one of whom is a non-executive director:

• Brendan is the managing director of TBC Ltd. He has been on the board of TBC Ltd for several years.
• Stephen is a chartered accountant and is the Chief Financial Officer at TBC Ltd and is an executive director of TBC Ltd.
• David is an executive director of the board who has substantial experience in the coffee bean industry.
• Jane is a non-executive director who barely attends board meetings and is a hairdresser.

The board of TBC Ltd has recently entered into a number of investments, including a new coffee bean factory, and some investments which have been losing large sums of money.  At a board meeting in March 2016, the board considered the company's financial statements relating to the loss making investments.  The financial statements were negligently prepared and showed a profit instead of a loss.  These financial statements were prepared by Stephen.

During the board meeting, Stephen failed to tell the director's about the loss and David failed to ask any questions about the financial statements, and Jane (as per usual) was absent from the meeting.  Due to time constraints, Brendan failed to read the financial statements, believing that Stephen would discuss the statements with him if there were any important matters that required his attention. 

The board of directors do not identify the mistake and authorise further investment in the loss making business ventures.  By May 2016, TBC Ltd is insolvent.

Discuss any liability of the directors of Alex Ltd in relation to these events. What are the consequences, if any of a breach of the Corporations Act? Refer to relevant legislative provisions and case law in your answer. 

Question 3- Rick purchased two shares in Shoes R Us Pty Ltd for $50,000.  Shoes R Us Pty Ltd makes and builds customised shoes which they manufacture and sell to retail stores.  Rick, now a non-executive director of Shoes R Us, is unhappy with the state of affairs of the company.  The following occurred:

• Shoes R Us Pty Ltd revenue has increased 300%
• Rick has received no dividends to date and Rachel and Tanya, the two executive directors of Shoes R Us Pty Ltd, have decided to pay no dividends this year.
• Rachel and Tanya have voted themselves a large pay rise and bonus.
• Rachel and Tanya have arranged for Shoes R Us Pty Ltd, to lease two expensive cars for their exclusive use.

Rick attends his first directors' meeting and questions the dividend policy and asks that he objection to the lease of the cars be recorded.

Tanya and Rachel decide to remove Rick from the board.  They hold a members' meeting and remove Rick from the board. 

Advise Rick as to his rights as a shareholder/member.   

PART B- Essay Question

Question 4 - Under section 180(1) of the Corporations Act 2001 (Cth), directors have a duty to act with care and diligence, according to the size of the company and according to the responsibilities expected of that particular officer.  Under section 180(2), there is a defence that the decision was a proper one under the circumstances, even though the decision later turns out to be not so good for the corporation.

What is the criteria that a director needs to satisfy under section 180(2) in order to establish this defence?  Do you think that section 180(2) does a good job in protecting directors in making business decisions? Does it need to protect director's better?

3250 words.

15 references.