LAWS3100 Corporations Law

QUESTION ONE

Part A-

Rob and Dale are the only directors and shareholders in Craftco Pty Ltd (Craftco) which designs, manufactures and distributes craft kits for children. Rob is in charge of design and Dale looks after manufacturing and finance. Neither knows much about accounting and Rob never asks for information from Dale about the financial position of the company. Rob believes that Dale has matters under control and finds 'business talk' boring. Dale would like to speak to Rob about how to manage the company's failing finances, but often has to make the decisions alone.

One day, Dale sees an advertisement on television for a 'get rich quick' scheme, and without making any further inquiries, sends a cheque for $15,000 drawn on Craftco's account. This is whole amount which Craftco has on deposit with Large Bank. The money is lost and cannot be recovered.

With reference to the relevant legislation and cases, advise if either director has breached their duty of care to Craftco?

Part B

With Craftco's business now in steep decline, Dale asks her accountant friend Cindy if she could reorganise the company's accounts. Cindy is shocked to find that proper financial records have not been maintained, and that money which had been put aside to pay tax and GST instalments, has been used to pay ongoing expenses. To keep the company trading, Dale orders paint sets from their supplier, 'Paints-R-Us' on the usual 30 days' credit terms, but within one month Craftco cannot pay this account. Cindy warns Dale about insolvent trading under the Corporations Act, and advises Dale to consider administration. Dale, however, is too distressed to cope with any more bad news and Rob says that he is confident that Dale will work something out and everything will be okay. With reference to the relevant legislation and cases, advise if either Rob or Dale has contravened section 588G of the Corporations Act and whether any defences under s 588H can be raised.

Part C

Would your answer be different if, before ordering the painting sets, Dale had called her sister and asked if she would be prepared to lend Craftco $3,000 if things got really bad, and her sister said that she probably would?

Since Cindy has spoken to Rob and Dale about the seriousness of Craftco's position, Rob is concerned that a painting owned by Craftco and valued at $20,000 may be placed in the hands of the liquidator if Craftco is wound up. Rob and Dale pass a directors' resolution donating the painting to the State Art Gallery. With reference to section 181 of the Corporations Act and cases, have the directors contravened their duties?

QUESTION TWO

Part A

Mal and Vinnie are the shareholders and directors of Big Build Pty Ltd (Big Build), a building and construction firm. Recently, the company has been experiencing cash flow problems with its largest customer, Franchise Homes, failing to pay Big Build's invoice. Consequently, Big Build is now insolvent. A liquidator has been appointed and is now challenging transactions to have them set aside. With reference to legislation and cases, advise Mal and Vinnie with regard to the following alternative fact situations:

1. Vinnie's sister, Meg, who provided marketing services to Big Build two years ago is owed $4,000. Fearing that Meg may not get paid, Vinnie paid Meg this amount from the company's secret cash fund. Is this a voidable transaction and if so, what type is it and can Meg raise any defence?

2. Twelve months before Big Build became insolvent, Vinnie had loaned Big Build $20,000 at an interest rate of 25%. Is this a voidable transaction and if so what type and can Vinnie raise any defence?

3. Mal is concerned that the antique tool collection valued at $10,000 and displayed in the front office could be placed in the hands of a liquidator. He decides to give them to his mother as a birthday gift. Is this a voidable transaction and, if so, what type is it and can his mother raise any defence?

4. A few days prior to Big Build's insolvency, Vinnie and Mal received a warning from Ms X the lessor, that unless they paid rent arrears of $25,000, Big Build would be evicted from the property and sued for the amount outstanding. At a directors' meeting Vinnie and Male resolved that Big Build would sell its earth moving equipment to Vinnie's son Rex for $25,000. The equipment is worth $38,000. Is this a voidable transaction, if so, what type is it and can Rex raise any defence?

5. At the same meeting, Vinnie and Mal also resolved that the company would pay their wages of $30,000 each for the past 6 months. Is this a voidable transaction and if so, what type is it and can Vinnie and Mal raise any defence?

Part B-

Mal's wife Tracey is employed part-time as the secretary of Big Build and is owed $1,500 in wages. She is concerned that Big Build will not be able to pay her salary and has arranged to borrow this amount from Large Bank. The new loans officer who was unaware of the company's financial position agreed to make the loan to Tracey but asked for a guarantee from Big Build as a matter of commercial prudence. Tracey signed the guarantee, forging the words 'Vinnie, Director' and 'Mal, Director' and then affixed Big Build's seal. With reference to the decisions in Northside Developments Pty Ltd v Registrar-General (1990) 8 ACLC 611 and Story v Advance Bank Australia Ltd (1993) 11 ACLC 629, would Large Bank be entitled to rely on the common law indoor management rule?

Would Large Bank be entitled to rely on the statutory assumptions?

QUESTION THREE-

Part A

Sid and Sam decide to buy a giftware business called 'Forever Giving'. Both have little practical business experience, although they have completed an on-line course in small business management. On 1 May 2014, they opened a joint bank account at Big Bank, and together signed a lease at 'The Shopping Nook Centre'.

The lease commenced on 1 June 2014, with the business formally trading on the 2 June 2014. Between May and June, Sid developed business and marketing plans and Sam entered into contracts for the supply of giftware. With the business trading successfully, Sid suggested that they should inject more capital into the business and expand by developing an on-line gift service. Sam agreed to do so and both asked Sid's Aunt Esme to invest by lending them $40,000.

Aunt Esme agreed to provide them with the loan, providing that the interest rate is 25%, that all decisions relating to the business must include her opinion as an advisor, and that she would receive 10% on the profit of each item of sale. As no other financial institution would offer them a loan, they agreed to Aunt Esme's terms. Aunt Esme saw her solicitor who prepared a loan contract between Aunt Esme, Sam and Sid, identifying Aunt Esme as 'the creditor' and Sid and Sam as 'the debtors'. All parties signed the agreement on 25 June 2014.

With finance in place, Sid and Sam engaged 'Software-R-Us' to develop and install their on-line software for $50,000. When Sid and Sam approached Aunt Esme for a further loan of $10,000 she refused, saying that the cost of the software was 'outrageous'. As Sid and Sam are unable to pay, Software-R-Us has brought an action in contract against Aunt Esme to recover its costs. With reference to the relevant legislation and cases, advise whether Aunt Esme is liable in contract to Software-R-Us for the development and installation costs?

Part B-

Giant Ltd has recently publicly announced an annual profit of $30 million. Aunt Esme is surprised at this as Giant Ltd's profits are usually very conservative. However, after reading Giant Ltd's latest annual report, with its unqualified financial statements, and impressive profits, Aunt Esme decided to invest $1 million in preferential shares. Two months later, it was announced on the news that ASIC had investigated Giant Ltd and found that the annual profits disclosed in their report had been grossly overstated as a consequence of 'Cut Price Auditors' professional negligence. With investment confidence and the share price crashing in Giant Ltd, Aunt Esme's shares plunge. She estimates that her loss, excluding the interest which she would get if her money had been invested elsewhere, is at least $950,000.

With reference to the relevant legislation and cases, advise Aunt Esme of any possible legal action which she may have against 'Cut Price Auditors'.