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Question 1

It has been said that good corporate governance is an important ingredient in corporate success and that regulators should encourage good corporate governance.


Discuss how good corporate governance is encouraged in Australia.

(Note, you may consider in your answer numerous sources of law such as the Corporations Act, general law directors' duties, ASX Corporate Governance Principles and Recommendations and other guidelines).

Question 2

Ahmed (accountant), Ben (entrepreneur) and Chen (operational skills) formed Drastic Designs Pty. Ltd. in 2006. They were executive directors and equal shareholders. The company's focus was initially on designing and selling handbags. Progress Bank lent them funds and took a security interest by way of a floating charge over the company's stock in trade.

In June 2009 Ben heard that the organisers of the Autumn Fashion Show were calling for tenders (bids) to design the stage for the fashion parade. Ben was excited at the prospect of bidding and thought it would assist the company's growth. Ahmed advised against putting in a tender (bid) for such a large project that was completely different to anything the company had done before. Chen thought it would be a good challenge. A resolution was passed (2:1) that the company would make a bid. Ahmed resigned from the Board in protest and Ben took over the role of managing director. Ben's girlfriend, Nula, joined the Board as a non-executive director to replace Ahmed. As she had some financial skills, she helped with the tender details. Drastic Designs won the tender.

Since Ahmed was not available to help with the financial side of the business, Ben hired Sam, a recent Bachelor of Commerce graduate, as book-keeper and generally to advise them on the accounting side of the business. Ben and Chen relied heavily on Sam. When asked by suppliers when they were going to be paid, Chen just told them to ‘see Sam - he is in charge of that sort of thing'.

By November 2010 it was apparent that the Autumn Fashion Show tender had been underpriced and that the project had lost $150,000. Sam made a list of outstanding debtors and paid those who were the most demanding.

In December 2010 Drastic Designs signed a one-year contract to redesign several office buildings. This meant that Drastic Designs had to employ more staff and buy more equipment. At the January 2011 Board meeting Nula expressed her concern that there was inadequate financial information being produced by Sam.

In February and March 2011 Drastic Designs was late paying its interest payments to Progress Bank, which threatened to take action if payment was late again. The bank refused Ben's request for further finance. Several unsecured creditors wrote expressing their concern with the fact their accounts were more than 90 days overdue. It is now May 2011.


(a) Discuss whether Ahmed, Ben, Chen, Nula and/or Sam are in breach of their insolvent trading duties under the Corporations Act 2001 (Cth).

(b) It is apparent that Drastic Designs is in financial distress - briefly identify and then explain the options for the directors and creditors and the potential impact of those options on Drastic Designs.

Refer to relevant sections of the Corporations Act 2001 (Cth) and to relevant cases, if any, in your response.

Question 3

GreenThumbs Pty Ltd (GreenThumbs) operates a wholesale nursery growing and selling garden plants. Suni, Pierre and Rachel are the only shareholders and directors. Suni manages the company's day-to-day operations. Pierre, who left school at 14 and has no tertiary qualifications, is in charge of the nursery.Rachel is a non-executive director who does not take an active part in the management or operations of the company.

Until recently, GreenThumbs has been very profitable. However, six months ago, a competing business opened nearby and since then GreenThumbs' profits have dropped considerably.

Suni thinks that GreenThumbs should move to larger premises in a different area. Without consulting Pierre or Rachel, Suni starts looking for new premises and she decides the first place she inspects is perfect, although the price is more than GreenThumbs can comfortably afford. Suni does not think this will be a problem, because there is no competition nearby and she expects that profits will recover immediately.

Suni calls a board meeting and tells Pierre and Rachel that moving will solve all the company's problems and that this property she has seen is absolutely perfect for GreenThumbs. She says they will have to act quickly as there is another interested purchaser. Suni does not tell Pierre and Rachel that she only looked at this one property. Suni is so enthusiastic that both Pierre and Rachel agree to the proposal even though Rachel is doubtful, feeling that they are being rushed into making a decision without being given time to consider other alternatives.

Pierre agrees to Suni's proposal without really understanding the financial implications.
GreenThumbs purchases the new premises but, because of continuing dry weather, its profits remain low. Rachel is becoming worried about her obligations as a director, especially if GreenThumbs' financial position deteriorates any further.


Advise Rachel about
1) her position in respect of any breaches of her general law or statutory duty of care and diligence as a director; and
2) whether her decision to agree to the purchase of the new premises would be protected by the business judgment rule.
Support your advice with reference to relevant sections of the Corporations Act 2001 and to cases.

You must answer2 ofthe 3 questionsin Part B.Each question isworth.

If you answer all3 questions onlyyour first two answerswill bemarked.

Question B

Mary holds 5,000 ordinary shares in Unity Ltd. The directors of Unity Ltd determined in April 2010 that a dividend of $2 per share would be paid in June and indicated to shareholders the dividend would be a cash payment paid on 28 June.

In May the company auditors indicated there were financial stresses as a result of the global financial crisis and it was unlikely the company would have sufficient profits to pay a dividend in June. As a result the directors of Unity Ltd revoked their decision to pay the dividend and made an announcement to this effect. Mary is angry about the directors' decision.

Given the financial stresses the board of directors has decided that the company should raise $12 million of additional capital either by an issue of debentures, or an issue of shares.

The company is bound by the replaceable rules in the CorporationsAct 2001 (Cth).

Answer the following questions

(a) Advise Mary whether or not she can insist on the dividend being paid. Support your answer with reference to relevant sections of the CorporationsAct 2001 (Cth). and

(b) Advise Mary how the Board of a publicly listed company decides whether disclosure is required when it wants to issue new shares to the public; and how disclosure should be made under Chapter 6D, CorporationsAct 2001 (Cth) when a publicly listed company decides to issue new shares to the value of $12 million. You should support your answer with reference to relevant sections of the CorporationsAct 2001 (Cth) and

(c) Mary believes that by virtue of owning shares in Unity Ltd, she has direct ownership of Unity's assets. DISCUSS whether Mary's beliefs are correct or not. In your answer identify some legal differences between equity capital (eg, shares) and debt capital (eg debentures).

Question B2

Amber Ltd is a public company. It is not listed on the ASX and it has no constitution. Su is a large shareholder of the company who is upset with the way in which Amber Ltd is being run. She does not consider the directors have made a sensible decision in deciding to borrow funds from Loans Ltd. As a condition of lending, an officer of Loans Ltd will be appointed as director of Amber Ltd. Su wants the company to have a constitution that requires directors to offer existing shareholders the opportunity to invest in more shares, before the board can seek funds by borrowing from an outsider. Su makes her proposal to Cliff, an executive director of Amber Ltd, who has a 10 year term under the company's constitution. Cliff and the other directors refuse to consider Su's proposal.

Answer the following questions. Refer to relevant sections of legislation in your response.
a) Do the directors of Amber Ltd have the power to borrow money from Loans Ltd?
b) Do you think Amber is listed on the ASX? Why, or why not?
c) Why would Loans Ltd want one of its officers to be appointed a director of Amber Ltd?
d) Does the Corporations Act allow Su to remove Cliff as a director even though he has a 10 year term under the company's constitution?

Question B3

Golding Pty Ltd operates a gold valuation business in Ballarat. It has three directors: George, Bess and Xian. George had signed a mortgage and guarantee in favour of Big Bank Ltd on behalf of Golding Pty Ltd. The guarantee secured a personal loan made by Big Bank Ltd to George. The mortgage was over Golding Pty Ltd's land in Mt Clear. Both documents were signed by George and appeared to have been signed by Bess. However, George had forged Bess's signatures on the documents and Bess was completely unaware of the transaction.

Golding Pty Ltd's constitution provided that such loan agreements could only be executed if authorized by directors' resolution. No such resolution had occurred, and indeed neither Bess nor Xian knew about the personal loan, the mortgage or the guarantee.

Big Bank Ltd had not undertaken searches to determine whether George and Bess were directors of Golding Pty Ltd prior to accepting the mortgage and guarantee as security and making the loan to George.

George has failed to repay the loan and has now left Australia. Big Bank Ltd is attempting to enforce the guarantee and mortgage against Golding Pty Ltd.

Discuss whether Big Bank Ltd can enforce the guarantee and mortgage (contracts) against Golding Pty Ltd

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