Corporate Law Questions

Part A

Question 1.  This question must be answered.

“’Corporate Governance’ is not a legal term. It describes the rules and practices put in place within a company to deal with the relationships between the board of directors, the management and the shareholders and other stakeholders.” Lipton, Herzberg and Welsh, 400.

“Good corporate governance will reassure shareholders and other stakeholders that their rights are protected and makes it possible for corporations to decrease the cost of capital and to facilitate their access to the capital market.” G20/OECD, 2015

Required: With reference to the knowledge you have acquired during this course and from the completion of your assignment, discuss these statements. In your answer, refer to examples of poor corporate governance to illustrate your points.

Part B: Answer any THREE questions. If you attempt more than three, only your first three answers will be marked. 

Question 1

This question has two parts. Both should be attempted.

One of the major advantages often identified for a company is limitation of liability. With reference to this concept, describe its meaning and scope (4 marks), and explain two situations in which such limitation of liability may be negated. (6 marks)

Anakin, Daala and Leia are the shareholders (in equal shares) and directors of Empire Pty Ltd, a property development company. The company does not have a constitution. Recently, board meetings have become difficult. Every time they disagree on any proposal, Leia claims that Anakin “persuades” vendors of land to lower their prices and that Daala and her team use sub-standard materials in construction while charging premium prices to purchasers. Both deny these allegations for which Leia has never produced any evidence. The tension in the meetings finally gets too much for Leia and she resigns as director. The others then want Leia to sell her shares to them in exchange for the return of her financial contribution to the establishment costs of the company.

Leia refuses, announcing her intention to remain a shareholder and do all she can to increase public awareness of problems with the company and its management.

Required: EITHER advise Anakin and Daala what they can and cannot do if they want to remove Leia as shareholder, OR advise Leia if she wants to prevent Anakin and Daala removing her as shareholder. (15 marks)

Remember to give reasons and refer to legislation and cases, where relevant, in your answer.

Question 2 

Albert and Tom develop a vehicle able to be driven across-country and be converted into a motor boat. They call this vehicle “The Dreamboat”. On the recommendation of their friend Marie (who is appointed by them as a third director), they set up a new company, Dreamboat Ltd, to sell them. To obtain premises and machinery, Dreamboat Ltd borrows $1 million from Big Bank. Albert and Tom have only built two vehicles as yet and there are a few issues to resolve (like the fact they have not yet worked out how to convert the Dreamboat from a boat back to a car). Postings by Albert on Facebook have attracted interest in the concept from dealers and tourist operators although none have ordered any vehicles. Albert and Tom believe the best way to get orders is to produce some Dreamboats for display and thus generate consumer demand. To do this, they need more money. Being innovative and creative, they decide to appeal directly to potential investors by showing them exactly what they will be supporting. Albert and Tom embark on a tour of the country, holding demonstrations of the vehicle at local investment fairs. To ensure interest in their demonstrations, they send out personal invitations to all those registered to attend these fairs and invite them to apply for tickets to attend “this special event”. Spectators are invited to invest in $1000 blocks in the company and, should they either provide money or promise to do so, are handed a document headed “Our Offer to You” (with space for the recipient’s name) that describes the company, what the money is to be used for (to build 5,000 vehicles in the first year), projected sales (at least 3,000 in the first year and 5,000 in the second) and how the money will be repaid (10% per year over 12 years, a sum that includes a return on investment). There is no mention of any issues with the vehicles or the fact none have yet been sold. Further, it states that if the recipient completes, signs and returns the form on the last page (which contains the commitment to invest) and ticks the box at the bottom, Dreamboat will give them shares worth $1500 each. About 30 eager would-be investors are very impressed and Albert and Tom collect $100,000 in cash and another $100,000 in pledges by the end of 4 weeks. They plan to use the cash to pay off their credit cards (that they had used to pay for their travel and accommodation on the tour) and put the rest in the bank for later.

At the last venue, Lee, an accountant, approached them, asking whether they had complied with the disclosure rules under the Corporations Act 2001.  Albert and Tom look blank.

Required: Advise Albert and Tom whether Chapter 6D of the Corporations Act 2001 applies, (9 marks) whether what they are doing does or does not comply, (8 marks) and the potential consequences should they not comply. (8 marks) If you believe they do NOT need to comply with any or all of this part of the Act, justify your position.

Remember to give reasons and refer to legislation and cases, where relevant, in your answer.

Question 3

Green Savings Pty Ltd. makes mini solar panels. It also tenders to provide environmental solutions for large development sites such as new supermarkets and shopping plazas. Green Savings was formed out of the partnership of three sisters with different skills. Annie is an accountant, Beverley is the ‘creative brains’ and Cindy the ‘hands-on’ operational person. These three are named as the members of the board of directors.  Their mother Dixie helps them out as well as she has a lot of business experience.

Beverley proposes the company tender to provide solar panels for the World Solar Powered Car Racing Competition in Darwin. Annie advises against the venture but Beverley, Cindy and Dixie support a motion that the company will make a bid. Annie resigns from the Board in protest. Dixie does most of the work on costing the tender and they are all delighted when Green Savings wins it.

Since Annie is not there to help with the financial side of the business, Beverley and Cindy decide to hire a ‘manager’ to ‘do the books’ and generally advise them on the accounting side of the business. Sam, a friend of a friend and a recent Bachelor of Commerce graduate, has been looking for work for some time. They hire him. As the bills come in and the bank balance falls, Sam becomes concerned but thinks that Beverley and Cindy, being experienced in business, know what they are doing. There certainly is a lot of activity and he knows the company is being paid by the Northern Territory Government for the design and supply of the solar panels.

Beverley and Cindy presume Sam will tell them if they are running out of money. When asked by suppliers when they are going to be paid, Cindy just tells them to ‘see Sam – he is in charge of that sort of thing’.

Green Savings completes the project on time and is paid by the NT Government but when Beverley and Cindy finally have time to look at the company’s position they are horrified to find out that they still have unpaid accounts of $300,000 relating to materials and specialist services obtained for the project. It seems their tender was underpriced. They are late paying interest on the loan the company took out to cover the purchase of some of the raw materials for the panels and the bank, a secured creditor, is threatening to take action if this happens again. Several unsecured creditors have written to Beverley explaining they are concerned that Green Savings is insolvent. Beverley has been so busy she has only just opened these letters.


Discuss whether Annie, Beverley, Cindy and/or Dixie are in breach of their insolvent trading duties, (8 marks) what the consequences might be if they are, (9 marks) and what they should do now. (8 marks)

Remember to give reasons and refer to legislation and cases, where relevant, in your answer

Question 4

This question has two parts. Both should be attempted.

The court may seek to attribute the acts of individuals and groups to the company. Name and explain the theory that has been developed to justify such attribution (5 marks) and identify where it may be applied. (5 marks)

Krazy Kars Pty Ltd (Krazy Kars) equips and sells customized off-road vehicles to operators in the tourist industry. The directors are Carlos, Possum and Michele. According to its constitution, although Michele as the only full-time director routinely arranges day-to-day purchases and services, any contract worth more than $100,000 between the company and any other party must be approved by a majority of the directors. With changes to the market, the company’s profitability is declining and the directors agree the business should diversify. Michele volunteers to explore options while she is touring Australia on her winter holidays and to come back with ideas to present to Carlos and Possum at the next directors’ meeting. The other two agree. When Michele arrives in Darwin she attends a car show and is fascinated by mini rally cars displayed at the MRC Pty Ltd stall. Sebastian, who owns MRC Pty Ltd, tells her that MRC is a new tourism enterprise and that he is looking for businesses able to construct and repair such cars. Michele hands Sebastian her business card that describes her position as “Managing Director” for Krazy Kars. Michele sees a real opportunity for Krazy Kars to get involved and, after Sebastian tells her there are lots of interested parties, immediately lets him know Krazy Kars can construct and supply 200 mini rally cars over the next calendar year. She signs a contract as “Managing Director of Krazy Kars” that commits Krazy Kars to provide those cars at a price “covering the cost of manufacturing plus 10%”.

On Michele’s return to the office she calls the other directors together to tell them the good news. To her disappointment, Carlos and Possum conclude that Krazy Kars is unable to meet these targets and that Michele had no right to make such commitments. They pass a motion (over Michele’s objections) that Sebastian should be told that Krazy Kars will not be providing the vehicles. When Sebastian finds out, he demands that Krazy Kars honours the contract Michele signed.

Required: EITHER advise Sebastian as to whether (and why) Krazy Kars IS bound by the contract OR advise Carlos and Possum as to whether (and why) Krazy Kars is NOT bound by the contract. (15 marks)

Remember to give reasons and refer to legislation and cases, where relevant, in your answer

Question 5

After a well-publicised fraud committed by one of its ex-managers, Giacco is appointed by Barnhouse and Co Ltd on 30 August 2020 to sort out its affairs and to determine its financial health. He is asked to advise the directors of Barnhouse of their options to decide on the future direction of the company once he has carried out his investigations. He discovers the following:

Barnhouse owes around $200,000 to three trade creditors. Since 15 August, Wells Ltd has been sending emails every day threatening to go to the media if it is not paid the $40,000 it is owed.

Barnhouse’s cash reserves and accounts receivable amount to some $20,000.

Holm Bank Ltd holds a security interest in the building Barnhouse owns and occupies as well as in the machinery used for production. Barnhouse owes Holm Bank $300,000. Holm Bank holds a mortgage over the building and the machinery. In 2014 the building was valued at $500,000.  It would cost more to remove the machinery for sale than any price it would fetch.

Barnhouse has three employees. They are owed $6000 each in wages/salary and entitlements that have remained unpaid since June 30 2020. Peacock has claimed $4000 for travel expenses. Axford, a manager, also holds 10% of the shares in Barnhouse and Co and is owed a performance bonus of $7000 from the 2019-20 financial year.

Wilden Pty Ltd, currently owed $5,000, has a circulating security interest over all stock held by Barnhouse. This security interest was granted in July 2020 when Wilden Pty agreed to supply raw materials on 40 day credit terms to Barnhouse for the next 5 years.

Required: Should Giacco recommend that the company be put under the control of an external administrator? By reference to Giacco’s findings, explain and justify your answer. (15 marks) Describe the implications for the company, directors, creditors and members of such a move. (10 marks)

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