WORKSHOP FIVE QUESTIONS (Directors duties)
Company Law Related (Australia)
Bananas Pty Ltd manufactures pyjamas and has a successful export business and worldwide recognition for the quality of its products. Benita One is the company’s non-executive Chairperson and Bob Two is the Managing Director. Ted Big is the Marketing Director of the company.
Benita has a material importing business and sells her products to Bananas Pty Ltd from which they manufacture their pyjamas. Bob has queried whether this is appropriate but Benita assures him that she is entitled to retain any profit because the prices she charges are fair and competitive. Further, that as the company’s constitution makes no mention of this whole subject matter she is not prevented from conducting such transactions.
Ted Big arranges for his partner Jemima to register a company named TJ Pty Ltd and the company commences to manufacture and sell dressing gowns. Business prospers.
Bananas Pty Ltd expands its activities to cover the full range of sleepwear products but finds it difficult to succeed with its dressing gowns as its customers around the world have agreements with TJ Pty Ltd. A company search at ASIC reveals Jemima as the sole director and shareholder of TJ Pty Ltd. Her home address in the ASIC records leads Bananas Ltd back to Ted and he is confronted with this discovery.
Ted contends that he has done nothing wrong as Jemima is entitled to do what she wishes, that TJ Pty Ltd is separate from him, that there was no intention to cause detriment to Bananas Pty Ltd as it was not trading in dressing gowns at the time when TJ Pty Ltd commenced business.
(i) Explain whether you agree with Benita’s assessment that she is entitled to retain the profits she has made.
(ii) Advise Bananas Pty Ltd whether it would succeed in any action against Ted Big.
Harry, Bert and Simon are the directors of Adventure Ltd, a company that organises holidays involving extreme sports. The members are Harry, Bert, Simon and Paul. The company is expanding and considering opening offices in Melbourne and Sydney. At a directors’ meeting, discussion as to staffing the offices takes place. It is decided to place an advertisement for two managers in the employment section of the West Australian Newspaper. Harry’s son Fred applies for the position in Melbourne and Bert’s nephew Trevor applies for the position in Sydney.
To fund the expansion, the directors of Adventure Ltd explore various alternatives. Adventure Ltd’s banker Bigbucks Bank is willing to lend funds to the company however the directors decide to issue a large parcel of shares to Eddie, who is a friend of the directors. As a result of the share issue, Paul’s shareholding reduces to 47%. Paul previously held 52% and had written to the directors expressing his dissatisfaction with their performance and his intention to remove and replace them at the next AGM.
(a) Discuss the procedure the directors and the company must take in order to appoint Fred and Trevor to these positions. Use the Corporations Act in support of your answer.
(b) Would your answer to the above be any different if Adventure Ltd was Adventure Pty Ltd?
(c) Discuss the relevant duty the directors may have breached by issuing the shares to Eddie. Include in your answer the test that the court may use to determine a breach of this duty. Use the Corporations Act and case law in support of your answer.
Thick Ice Ltd operates an ice skating rink. The directors of Thick Ice Ltd are Henry (chairperson of the company, non-executive director and retired accountant); Jack (managing director) and Tanya (non-executive director and ice skating star).
Last year the directors decided to expand the company’s business by opening shops to sell winter sports equipment. The shops commenced trading just before a directors’ meeting at which Jack persuaded Henry and Tanya that they only needed to hold board meetings every 3 months, as the company’s business was consistently successful under his management and did not require any closer monitoring. Over the last 6 months there has been 2 directors meetings and at each of them Jack has been unable to present financial reports claiming that there were problems with the accounting software that had prevented the reports from being ready. On each occasion Jack had advised Henry and Tanya that everything was fine and he estimated the company was achieving budget.
Yesterday, Henry and Tanya were summoned to an urgent meeting by Jack. He informed them that the new shops had not been profitable; that the company had not been able to pay for the inventory it had purchased at the time of opening the shops; and, the company was now insolvent and would have to be wound up.
Jack admitted to Henry and Tanya that the reason there had been no financial reports was that he had reduced accounting staff to save money but that he had worked very hard to save the company and had done what he thought was best for it. Henry did not consider he had any responsibility for the failure of the company as he had relied on Jack. Tanya felt that as she was only appointed a director because she was a famous skater, the company’s business and financial position was not her responsibility.
For each director, discuss their performance under the duties of care and diligence AND to prevent insolvent trading (include any relevant defences available).
[Refer to cases and sections of the Corporations Act where appropriate]
WORKSHOP SIX QUESTIONS (Membership, members’ meeting and members’ remedies)
(a) Mary shows her share certificate in Gamble Pty Ltd to Cyril. The certificate displays a shareholding of 10,000 ordinary shares. A transfer of shares form is signed and Cyril pays Mary $20,000 for the shares. Cyril lodges the share transfer form and Mary’s share certificate with Gamble Pty Ltd. The company secretary of Gamble Ltd writes to Cyril advising that the share certificate accidentally displayed an extra “0” and that only 1,000 shares were owned by Mary and these have been recorded in the share register under his name. The company points out that the register displayed the correct shareholding of 1,000 shares and Cyril should have checked this out. Cyril cannot find Mary who has departed for Iraq.
(a) Describe the legal significance of both a share certificate and an entry in a company’s share register. Do share certificates have to be issued for all shareholdings?
(b) How does a transfer of shares differ from a transmission of shares?
The members of Revolution Ltd are dissatisfied with rule 15 of the company’s constitution which gives the directors the power to borrow funds as they see fit. The members wish to amend this clause so that the directors must obtain members approval before any borrowing can take place.
The directors refuse to hold a general meeting to consider the amendment.
(i) Are the directors entitled to refuse to hold the general meeting?
(ii) Describe the alternative methods provided in the Corporations Act for the members to place this matter before a members’ meeting for consideration.
Hiphop Pty Ltd (a company without a constitution) distributes music CD’s. Its directors are Spike Hip and Chelsea Hop. Its members are Spike, Chelsea and Fred Flop.
One day Fred hears some exciting new music and inquires into its source. He discovers that the music producer was Rage Records, an organisation that usually used Hiphop Pty Ltd to distribute its music. However, these CD’s had been distributed by a company called SC Pty Ltd. Fred searches company records at ASIC and finds SC Pty Ltd has Spike Hip and Chelsea Hop as its directors.
Fred writes to Hiphop challenging the directors over their conflict of interest, claiming that they should give the company the profits SC Pty Ltd has made from their diversion of Hiphop’s business. Spike and Chelsea call a general meeting of Hiphop Pty Ltd and at the general meeting have the votes to successfully pass a resolution approving their actions, authorising them to continue to divert Hiphop’s business as they see fit and to retain any profits therefrom.
Advise Fred on the validity of the resolution passed at the general meeting and whether there is anything a minority shareholder can do.
All questions must be answered for all chapters relevant to that particular workshop.
Please note that answers to chapter questions are NOT to be in note form.
Where relevant you should be using the IRAC method of answering legal problems.