WORKSHOP QUESTIONS WORKSHOP ONE QUESTIONS Question One Explain in your own words the following: \"In Australia, the Corporations Act is Commonwealth legislation and yet the Commonwealth Government does not have the constitutional power to enact this law\". Question Two Fred wants to buy a car from Colonel Motors Ltd but is unsure if a company could be the owner of such an asset and who he would sue, if the contract was breached. Rather, Fred believes that as he has been discussing the contract of sale with Mary, the Sales Manager of Colonel Motors Ltd, he should enter into a contract with her and then he can sue her in the event of a problem. Using the CA and cases, explain whether a company has the legal capacity to own a car and contract with Fred. Should he contract with Mary? Use sections and cases to support your answer. Question Three Premium Plumbing Pty Ltd (Premium) required further capital for expansion and two years ago it borrowed $200,000 from Eastpac Bank Ltd (Eastpac). Recently, an unforeseeable misfortune occurred, causing Premium to suffer a large loss. It immediately advised Eastpac and stopped trading. One of the directors, who was also the largest shareholder, made a loan to the company 5 years ago and has an agreement that entitles him to be paid before any other creditor. After repaying the director, Premium has insufficient funds to meet its obligations to the bank. Eastpac is considering ways to recover its money. (i) Would Eastpac Bank Ltd be successful in arguing that as directors control the company, there is no real separateness between the parties and the company is not legally capable of entering into a contract that entitles the director to priority for his loan? (ii) Are the directors, shareholders, or employees liable for the debts of Premium Plumbing Pty Ltd? [Quote sections and cases to support your opinion] Question Four Bill and Ben operate a partnership that grows and sells garden plants. They decide to register a company to be named Flowerpot Pty Ltd and sell their business to it. The plan is for the company to raise funds of $400,000 by borrowing $100,000 from Bigbucks Bank Ltd and issuing 300,000 shares for $1.00 each - 100,000 to Bill, 100,000 to Ben and 100,000 to Pansy, a friend of Ben. Before Bigbucks Bank Ltd will lend money to the company, it requires a personal guarantee from Bill. The shares to be issued to Pansy are to be paid up to 60 cents, whilst Bill and Bens' shares are to be fully paid on issue, being paid for by the transfer of the partnership business. (i) Describe the liabilities faced by Bill and Ben whilst operating their partnership. (ii) Describe the liabilities faced by Bill, Ben and Pansy after the registration of Flowerpot Pty Ltd and the receipt of the bank loan. [Refer to sections of the CA, where applicable.] (iii) How would the liabilities of Bill, Ben and Pansy be different if the company was registered as \"Flowerpot Pty\"? Question Five For many years Ali has been the chief chemist with the Pop-a-Pill Drug Company Ltd. His employment contract in clause 33 requires that in the event of Ali leaving his employment, he will not work \"in competition with the Pop-a-Pill Drug Company Ltd for 1 year\". Ali registered an Australian company [Gee Chemicals Pty Ltd] and when he resigned from Pop-a-Pill he immediately became the managing director of Gee Chemicals. Pop-a-Pill claims Ali is in breach of contract. Ali says that Gee Chemicals is in competition with Pop-aPill Drug, but he personally is not. Later, Gee Chemicals Pty Ltd is found to be selling drugs in breach of the law. Ali claims that he is only an employee and that it is the company that has broken the law, not he. Discuss [A detailed discussion of contract law or criminal law is not required here] Question Six Digger has a new mining venture and he plans to register a company. There are already 40 investors prepared to invest $10,000 each. To commence exploration $500,000 will be needed and Digger will contribute $300,000 with the remaining $200,000 made up of $5,000 from each of the other 40 investors. The company must obtain a further $500,000 after one year to complete the geological surveys and register the mining claim with the Government. At that time Digger will put in a further $300,000 and the company will need the remaining $200,000 from the other investors. Digger wants to have sole management control of the company and keep the company's affairs private and confidential. He also knows that after the claims have been lodged next year, the growth of the company will require the number of members to at least double. Digger's accountant has advised him that the company most suited for his needs is a no liability company. Do you agree with this advice? Question Seven Monty and Mary are the only directors and shareholders of Contrary Pty Ltd. Mary holds 60% of the shares and Monty has 40%. Mary decides she would like to convert the company to On-side Ltd. Advice Mary over the following matters: (i) She hopes that the new company won't have to pay the debts of Contrary Pty Ltd. (ii) She wants to know at least five differences in the principal characteristics of the two types of companies. WORKSHOP TWO QUESTIONS Question One Simon has decided he will register a company Cosec Pty Ltd and offer company secretarial services. Before he is ready to register the company he searches for a suitable office and finds a perfect location. Simon signs a 20 year lease under his name. He also signs a 2 year rental agreement with a telephone company, signing on behalf of the proposed company. Before Cosec Pty Ltd is registered Simon gets offered an attractive sum of money to assign the office lease over to another party. Simon takes the money and transfers the lease. Cosec Pty Ltd is registered and at the first directors' meeting the ratification of Simon's telephone agreement is considered. The directors opt for another telephone system that they consider better suited to the company's needs. REQUIRED: (a) Discuss whether Simon breached any obligations by transferring the office lease. (b) Does the telephone company have any right of action against Cosec Pty Ltd or Simon? Question Two Digitup NL has a constitution that does not repeal any of the replaceable rules of the CA but does provide for two additional matters: (i) an objects clause provides that \"the company's activities are restricted to the exploration and extraction of gold and silver\". (ii) another clause provides: \"Gary Granite is to be the company's Senior Geologist at a salary of $200,000 pa\". The directors of Digitup NL have decided to ignore the constitution and to carry out the following actions: to operate a tourist business in outback Australia and to that end the company has contracted with Dodgy Pty Ltd for the purchase of 2 buses. to sack Gary Granite as senior geologist. Required (a) Digitup NL refuses to pay Dodgy Pty Ltd for the buses, arguing that it has no legal capacity to operate a tourist business and that Dodgy would have known this limitation from its name. Advise Dodgy Pty Ltd. (b) Gary Granite writes to Digitup NL claiming he cannot be sacked under the company's constitution. He is told he has no contract but he buys some shares in Digitup NL and writes again, this time claiming he has a contract. Advise Digitup NL. (c) Advise the directors of Digitup NL if they can amend the constitution? If not, what is the proper process? [Note: You do not have to consider whether the directors have breached their duties when answering this question.] Question Three Julie has been a shareholder in Indahouse Pty Ltd for some years and is upset to receive a letter from the company instructing her to transfer all of her 200 shares to Bob Marley. Julie makes inquiries and discovers that Bob Marley is a close friend of the Indahouse chairperson Al Gee. She also learns that the company's constitution contains a rule that provides \"the chairperson of the company may, as they see fit, order any member to transfer their shares to any person at a fair market price\". (a) Julie does not wish to sell her shares. Is she bound to observe the order she has received? Jimmy, another shareholder, discovers that as the company requires more funds the directors plan to issue a parcel of shares to a single investor without the members being able to participate. (b) Are the directors correct in issuing the shares, as they plan? [Note: there are insufficient facts to enable you to reach a single conclusion here. You are not told what, if anything, the company's constitution states about share transfers. Provide the alternative answers.] Question Four Tipsy Ltd is an importer and distributor of French wines. The Managing Director is Marie and the Company Secretary is Pierre. The company has no constitution and the Board of Directors exercise tight control over the company. The Board has implemented an instruction that their approval is required for any purchase of wine in excess of $50,000. During the last month the following three transactions and developments occurred: (a) Marie signed a contract to purchase $55,000 of wine. The other directors do not like the wine and refuse to accept it on the grounds that Marie lacked authority by breaching the purchasing limit set by the Board. (b) Pierre, in France on holiday, visits one of Tipsy Ltd's suppliers. He tastes and likes a new wine and signs a contract for Tipsy Ltd to purchase the wine for $10,000. The board of directors wishes to rescind the contract on the grounds that Pierre had no authority to sign the contract. (c) The senior executives of Tipsy Ltd were absent at a management seminar and Renee, the company's Office Manager, was left to mind the whole office, including the sales department. When Smashed, a liquor store chain, phoned to place an order, Renee negotiated a price and sold some wine. Edith, the company's Sales Manager, had planned to sell that same wine to another customer at a higher price. Tipsy Ltd advises Smashed that they will not supply the wine as Renee lacked authority. REQUIRED: Analysis each transaction, advising on Tipsy Ltd's contractual obligations, if any. [NOTE: Your answers should include a description of the type of authority (if any) for each transaction and include sections of the Corporations Act and cases where appropriate.] WORKSHOP THREE QUESTIONS Question One Moneybags Ltd wishes to raise $11 million from the issue of shares to the public without lodging a prospectus. Advise Moneybags Ltd. Question Two Little Pty Ltd wants to raise funds. What are the restrictions of the CA and what are its alternatives? Question Three Describe the effect section 710 CA has over the content of a prospectus and what circumstances must exist for a successful \"due diligence\" defence to be mounted if an adverse matter has been omitted? Question Four StuffUp Ltd lodged a prospectus to raise funds for an exciting new venture. A few days after lodgement, the directors of StuffUp discuss at a Board meeting some information that the Managing Director believes should have been included in the prospectus. Discuss. Question Five (a) What are the differences between 8% $2 cumulative redeemable preference shares and ordinary shares? (b) Explain three differences between the redemption of redeemable preference shares and the buyback of ordinary shares. (c) Equality Ltd has issued 5 million ordinary shares with 10 votes per share and 1 million preference shares with 1 vote per share. The company has no constitution. At a general meeting, all members vote and by a majority of 50 million votes to 1 million votes, a resolution that the dividend rate for preference shares be reduced from 10% to 8% is passed. Rupert owns some preference shares and seeks your advice. Question Six (a) \"The Doctrine of Capital Maintenance is dead\" - do you agree? (b) Briefly outline the company processes necessary to undertake the following: (i) (ii) (iii) (iv) Rich Pty Ltd wishes to buy-back 9% of the shares held by each member. The members of Poor Ltd are spread across Australia. The company plans to offer to buy-back 2,000 shares from each member resident in Western Australia. Massive Ltd is listed on the Australian Stock Exchange and has decided to buy-back 14% of its issued shares through the stock exchange. Cashedup Ltd issued shares for $1.00 but only called them up to 70 cents. The company no longer believes it will require all the uncalled capital of 30 cents per share and wishes to reduce it to 10 cents, by writing off 20 cents. WORKSHOP FOUR QUESTIONS Question One What is the difference between: (a) a managing director and a chair? (b) a nominee director and an alternate director? Question Two Kelvin-Decline Ltd manufactures and wholesales fashion clothes. The company has 3 directors, including Kelvin, the managing director. The company does not have a constitution. The directors are negotiating to sell the company's factory and to shift manufacturing to China. All the members attend an annual general meeting of the company and the directors advise the meeting about their plans for the future. The members disagree with the factory closure and a resolution is passed by 80% of the votes that the company is not to sell its manufacturing facility. The directors tell the members that they will ignore their resolution. The members then pass a resolution removing a director. They then vote to replace the managing director. REQUIRED Advise the sacked directors about the matters above. If you do not consider the members have acted correctly, provide alternative procedures they could have used. Question Three \"Directors have a duty to put the interests of shareholders ahead of any other party\". Do you agree with this viewpoint? Question Four The directors of Final Ltd have been monitoring for some time the declining sales and profitability of the company. They decide the company should change to a new product range which is predicted to be more profitable. These new products will require an increase in capital to set up a new factory and the directors make a large share issue to Mick Deadwood to obtain the necessary funds. Lee Lion is a shareholder in Final Ltd. He is unhappy that his shareholding, which represented 26% of the issued shares, has now been diluted to 20% after the share issue to Mick Deadwood. He claims that the directors have issued the shares with the intention to dilute his shareholding so that he will not be able to block alterations to the company's constitution. The directors reject Lee's claim asserting that they only care about the company's best interests. Lee is considering whether a court would find the share issue invalid. REQUIRED Describe the directors' duty that is relevant to these facts. Include cases in your answer and discuss from the facts above those matters that the court would consider important in reaching its decision. WORKSHOP FIVE QUESTIONS Question One 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. Required: (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. Question Two 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. REQUIRED (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. Question Three 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 (nonexecutive 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. REQUIRED: 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 Question One (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. Advise Cyril. Question Two (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? Question Three 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. REQUIRED: (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. Question Four 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