In November 2020 the Australian Government announced $250 million in funding for sustainable housing affordability research through its “Reach Out” grant. Build It Ltd is a public company that has been listed on the ASX since 2014. Build It Ltd was formed to invest in new opportunities in pre-fabricated housing and has a strong focus on housing affordability.Build It Ltd has five directors. Its executive directors are Bill and Jess and its non-executive directors are Sam, Pat and Margaret. Bill is the Managing Director and Margaret is the Chairperson. Jess’ title is “Director, Innovation”. All the directors are based in Sydney except for Pat who lives in Los Angeles. Bill, Jess and Pat are substantial shareholders of Build It Ltd. Until 2012, Sam was the managing director of a large property development company but now does consulting through a small proprietary company in which he and his wife are equal shareholders, called OzBuild Pty Ltd.On 15 January 2021 Jess attends a meeting with the Reach Out grant executive committee and decides that it is essential that Build It Ltd should apply for funding.Due to the 2020 COVID-19 pandemic, business has been almost non-existent. Jess is concerned about the $2 million ATO bill which Build It Ltd just received on 2 January 2021 and knows Build It Ltd cannot afford to pay it if K and K Accountants Pty Ltd cannot successfully challenge it. Jess knows that Sam holds an option to purchase 600 lots of land which he is keen to bundle up each lot with a pre-fabricated home and sell off. Obtaining the Reach Out grant will be an excellent platform for Sam to advertise the special home and land packages and benefit directly from the deal. It will also hopefully generate shareholder and investor interest in Build It Ltd. Straight after the meeting, without wanting to waste any time Jess signs an expression of interest form and submits it to the Reach Out committee without checking with any of the directors of Build It Ltd. The Reach Out committee confirms receipt of the proposal and says that Build It Ltd will be notified of any successful outcome. Two days later Jess then convenes a board meeting to discuss the proposal and confirm her decision to submit the expression of interest. Notice of the meeting is sent to all directors except Pat who regards himself as a “silent partner” and who rarely attends board meetings. Bill and Margaret are aware that Sam has a background in property development and does private consulting. On 20 January 2021 Bill and Margaret decide that the opportunity for the Reach OutGrant is too good to pass up and together set up a separate company, Rocket Pty Ltd. The start- up costs for Rocket Pty Ltd were obtained through a $1 million non-recourse loan from Build it Ltd signed by Bill and Margaret as directors of Build It Ltd.Bill and Margaret do not declare their interest in Rocket Pty Ltd and continue to sit in on meetings discussing the grant proposal and plans. Bill and Margaret give proper consideration to all matters presented to the board and believe that they are working in that capacity in the best interests of Build It Ltd. They believe that they are able to

 

5distinguish between Build It Ltd and their personal interests and view it just as another company tendering for a publicly awarded grant. Bill and Margaret appoint a CEO for Rocket Pty Ltd who is very experienced in the industry and obtaining Government grants (Zach) and he (independently of Bill and Margaret) engages several academics and industry specialists to prepare the Reach Out grant application. Bill and Margaret do not specifically share any of the informationdiscussed by Jess. Rocket Pty Ltd is able to undercut Build It Ltd in its proposal and much of the grant proposal is due to the skills and hard work of Zach. Jess, Sam, Bill and Margaret hold a board meeting on 14 February 2021 and resolve that Build It Ltd should pursue the Reach Out grant. A few hours after the meeting Build It Ltd makes an announcement to the ASX that Build It Ltd ‘is excited to soonpartner with the Australian Government in a substantial investment under the Reach Out grant to research into housing affordability in the midst of a housing crisis’.Later that day in Los Angeles, Pat reads the announcement. Pat immediately calls Bill and say that he is completely against the proposal and that the ASX announcement is being made prematurely. Following the announcement, the price of Build It Ltd shares increases by 45%. Pat sells his shares and makes a huge profit.Two months later in April 2021 with Rocket Pty Ltd up and running, Bill and Margaretresign from the board of Build It Ltd. Five months later in September 2021, the Reach Out grant is successfully awarded to Rocket Pty Ltd. When the Reach Out / Rocket Pty Ltd decision is announced, Build It Ltd shares fall in value by almost 60%and an administrator is appointed to Build It Ltd in October 2021.

Question:(1a) Advise Build It Ltd as to its potential rights and liabilities against all respective parties. What action could ASIC take (if any) against the directors?

(1b) Mike a disgruntled shareholder of Build It Ltd comes to see you in your office. Advise Mike as to his potential rights

Answer rating: 100% (QA)

ANSWER 1 In the case of an agent acting for an undisclosed principal the mutual rights and liabiliti... View the full answer