In response to recent upheavals, the Australian Securities and Investments Commission (ASIC) has placed bans on short selling. Discuss the significance and role of ASIC. In so doing discuss (eg) why it is necessary to have a regulator for corporate law; the importance of having a national system of regulation and the ban on short selling.
(b) Shorty and Shifty set up a company called Simpleton Ltd. Through the business organisation Simpleton Ltd, Shorty and Shifty raised shareholder funds to purchase a Goldmine from Façade Ltd. The Goldmine was long since past its best and most productive, but Shorty and Shifty paid the market rate that would have applied to an active mine, in its prime. Some time after the purchase, Shorty and Shifty left the jurisdiction. After they mysteriously departed, the minority shareholders of Simpleton Ltd discovered that Shorty and Shifty were the owners of Façade Ltd.
The minority shareholders of Simpleton Ltd seek your advice as to what action they can take in relation to their rights and the actions of the directors. In advising the shareholders, discuss whether this action provides a role for ASIC and, if so, why that is important. Briefly consider the remedies that are available in this case and whether the type of company influences the remedies to be sought. Would your answer differ if Shorty and Shifty were not the owners of Façade Ltd and if they had not left the jurisdiction? Why?
(c) Directors and liquidators both have duties. As business students you could occupy either role. Briefly analyse the similarities and differences between the role of directors and liquidators and their duties. In so doing, briefly discuss the aspects of corporate insolvency and corporate governance that have a public law or public interest element. Are laws relating to corporate contracting relevant in this regard?
(Total 30 marks)
ANSWER ALL PARTS
(a) Toolbox was a comedian. Due to his roguish humor, Toolbox gained many offers to serve on boards of companies. (He made the meetings more lively and introduced a new perspective into board room discussions). In the course of serving as a Director of Not the Sharpest in the Shed Ltd (NTSS), Toolbox learnt a lot about NTSS’s market strategy for the coming years.
For example, he learnt it was starting an ad campaign aimed at Generation Y, it was about to lose a court case and it was considering expanding its business overseas. Subsequent to learning these matters, but before any of them actually occurred, Toolbox sold his NTSS shares and discussed with directors of another company on whose board he served the feasibility of starting an ad campaign aimed at Generation Y.
Has Toolbox breached his duties to NTSS? If so, which ones and what is the strength of the case against him? In so doing discuss relevant cases and evidence. Also discuss the penalties he may face and what occurs when there are a variety of actions that could be taken against a director. Why have these sorts of situations lead to discussion by judges and scholars of white collar crime?
(b) Recently, there have been reforms to the laws on corporate insolvency and voluntary administration. Briefly discuss those key reforms and why they were adopted. In the course of your analysis discuss particular issues relevant to group insolvencies and restructures.
(c) It is often said that the bedrock of corporate law is the notion of the corporate veil. As business people you would not only be likely to deal with corporations as separate business organisations but you might also hold roles as directors. Would the courts be likely to lift the corporate veil or seek redress against you in relation to all of the following circumstances?
- You are the sole director of a Company X. Several years after it is formed, Company X collapses. In the early stages of Company X’s life, you had loaned it money from your personal funds. After the collapse you seek to become a preferred creditor of Company X. What would your position be?
- The facts are the same as above, except that this time your loan is made within months of Company X’s collapse and after it has experienced financial turmoil.
- You have established a subsidiary company but that subsidiary has no books of account and no business charter of its own, it seems very much to follow the lead of the holding company.
QUESTION 1: (Answer all parts)
Burt and Ernie had both just caught the investment bug. Burt invested in Telecorp Ltd – a communications company which was hitching its future prospects to the National Broadband Network (NBN). Ernie invested in a new corporation that promised a personal development regime delivered through a national network of personal training studios, Hyper Active Ltd.
When Burt made his investment he relied on word of mouth from friends and documents produced by the corporation which stated: “This is a once in a lifetime chance – our corporation is positioned to take advantage of the NBN because of our close links to government.” When Ernie invested he relied on a prospectus that said: “Your future personal success is guaranteed through this move.” Both investments failed. Answer the following questions:
(a) Burt and Ernie now seek your advice as to the legal issues that arise in relation to their failed investments and the documents on which they were based. Is there further information you would need? (7.5 marks)
(b) Further information becomes available that many self improvement gurus are not licenced; that there have been law suits against them in the United States; and that there is now evidence that some personal trainers have caused nervous breakdowns as they have pushed clients too hard. That action had caused such corporations to be sued. With this information in hand, is there any way a prospectus could be legally drafted for the company in which Ernie invests? If so, explain how. Would your answer differ if Ernie was a professional or sophisticated investor? Answer giving reasons. (5 marks)
(c) Imagine the facts change. This time the only evidence available is that Burt and Ernie are shareholders in Telecorp Ltd and Hyper Active Ltd, respectively, and that both companies have collapsed. Burt and Ernie wish to know if they could be preferred creditors in an insolvency. They are also interested in whether they might be able to access funds of the related companies of the ones in which they invested. Briefly advise Burt and Ernie. Is there further information you would need to answer that question? (7.5 marks)
(d) Imagine the facts of the case change again. This time Burt and Ernie are actually members of two corporations ABC and XYZ. As investors of ABC, Burt and Ernie are unimpressed with the decision taken by management to outsource work and they seek to prevent directors from doing that.
In XYZ they represent only 1% of the company’s voting shares and seek to prevent their expropriation from the company. Discuss their prospects of success in both cases. Would your answer for either scenario alter if a takeover was announced? (10 marks)
QUESTION 2: (Answer all parts)
- (a) Re CSR Ltd and James Hardy v Briggs are often mistakenly linked as exemplifying the same point. In fact, they do not. Analyse the legal significance of those cases. (15 marks)
- (b) Jada is a partner in Bloggs and Co. Bloggs and Co is a partnership in the garage business but unlike most such partnerships, Bloggs and Co has an internal agreement not to sell cars. When might Jada be able to rely on an agreement of that type to avoid liability if a car sale takes place and there are subsequent problems with the sale? Have there been cases which have held partnerships liable for a transaction even although it is questionable as to whether such a transaction is of the type they usually complete? Why have those cases been decided that way? Discuss giving reasons from statutes and cases. (15 marks)
QUESTION 3: (Answer all parts)
(a) In running a public company, Daryl was managing director and Lewis was executive director. They both had information that the company was both engaged in foreign currency transactions and that it was (as an insurance company) exposed to losses due to the Pakistan floods. Early into the flood disaster, Daryl and Lewis ordered a report on the exposure of the company to the risk of insurance claims associated with the floods – which found the extent of the exposure minimal.
At the same time, they receive accountant’s advice to pull out of foreign currency trades because the recent collapse of the Greek economy in April 2010 had highlighted how vulnerable the Australian dollar could be in times of crisis. Daryl and Lewis ignored this latter advice. Advise them on their position. Would your answer differ if the business mentor of Daryl and Lewis had been the person who told them to ignore the advice? (10 marks)
(b) There has been criticism of the way ASIC has run cases in eg ASIC v Rich (No 2); and ASIC v Vizard. Discuss the nature of those criticisms and what they show about the nature of corporate prosecutions. In answering the question, discuss any other cases you think are relevant. (7.5 marks)
(c) There is a saying that partnership law never changes but corporations law always changes. Is that correct? Why? Briefly discuss with reference to decided cases and relevant laws. (10 marks)
- (d) “As of 2011, the spirit of the Trade Practice Act 1974 (Cth) will have disappeared.” Is that statement correct? Briefly outline the reasons for your answer. (2.5 marks)
Company Law Questions (for use in class in Cairns) – Basic Principles
As a sole proprietor, Seymour conducted a highly lucrative business making and delivering pizzas to the affluent residential areas abutting the local university.
In June, Seymour sold his business to Talbot for an exorbitant sum. A clause in their agreement stipulated that for two years after the sale Seymour would not conduct a similar business within five kilometres of the business premises.
In July, in the name of Better Pizzas Pty. Ltd., a company proposed to be incorporated by him, Seymour leased premises situated next door to Talbot from Lance
In August, Better Pizzas Pty. Ltd. was incorporated with Seymour being employed as Managing Director. Seymour was the sole shareholder in the company.
From the premises leased from Lance, the company conducted a pizza delivery business in direct competition with Talbot.
Seymour has now received claims against him personally, from Talbot, demanding that he discontinue the pizza operations of Better Pizzas Pty. Ltd., from Lance demanding unpaid rent and from local suppliers seeking payment for ingredients supplied to Better Pizzas Pty. Ltd.
Harry was appointed under a service contract as managing director for five years. The contract was stated to be subject to the Constitution.
The Constitution stated that directors could be removed by special resolution, however, subject to the provisions of any service agreement. A special resolution was passed and Harry was dismissed with three years left to run.
Harry now seeks your advice as to whether he can enforce the service agreement.
George, Tony and John are the only shareholders in a manufacturing business called “Canit Pty Ltd”. George owns 80% of the shares and both Tony and John hold 10% each. George also holds the position of Managing Director of Canit Pty Ltd.
George is ambitious and decides to put his long-held vision of holding 100% of the shares in the company into action. He wants to change the constitution to allow a shareholder holding 35% or more of the issued share capital of Canit Pty Ltd to acquire the shares of a shareholder holding less than 15% of the issued share capital, at “fair market price”.
- (a) Advise George as to what procedural steps must be followed to validly alter the constitution.
- (b) Tony and John are concerned that George will apply the necessary procedures required to alter the constitution. Advise Tony and John whether there are any other grounds upon which they may challenge the compulsory acquisition of their shares.
- (c) If George held 90% of the issued share capital would he need to change the constitution to acquire the rest of the shares? Discuss.
Paul is a director of Sparky Pty Ltd, an electrical services company. He signed a contract on behalf of the company to buy some electrical components from X Co. However he was not authorised by the Board of directors to enter the company into this contract and the Board do not wish the company to be bound it.
There is evidence that the Board acquiesced in Paul to making such contracts for the company in the past. There was also a provision in the Constitution authorising the Board to appoint a Managing Director.
Advise the company. Identify any further facts you would like to know.
ABC Enterprises Ltd was incorporated under the Corporations Law and adopted the replaceable rules, subject to certain modifications and additions, including: “A poll may be demanded by at least 6 members entitled to vote on the resolution” and “Proxy documents must be received not less than 4 days before the time for holding the meeting.”
ABC Enterprises Ltd was due to hold its last annual general meeting on 16th July. On 3rd June, some of the members notified the company that they wished to have Kurt, one of the directors, removed.
At the meeting, the agenda contained no reference to any resolution for the removal of Kurt from his directorship.
Jason, went to the meeting and voted against the resolution but the chairman declared it passed. Jason and 4 other members (including a proxy nominated 48 hours earlier) demanded a poll but this was refused by the chairman.
Advise Kurt as to whether his dismissal was lawful.
Kath, Kim and Sharon are having coffee after completing the last of their variety dance classes and are complimenting each other on their impressive dance skills. The conversation turns to using their newly acquired expertise to open up a dance studio to teach beginners.
They call their business a joint venture and decide that they should run the business in consultation with one another. They agree to share the profits equally and decide that they should all have access to the financial details of the business. Sharon will use the skills she acquired as treasurer of the netball club to run the administrative side of the business, while Kath and Kim will run the boot-scooting and flamenco dance classes.
During the two weeks it took to find suitable premises, the dance trio open up a bank account under the name of “Look at Me” Dance Studios, and are finally ready for business.
The business has been going well for a couple of months, when Kath decides that the dance floor in the studio she runs the boot-scooting class is not quite good enough. She believes she will get more pronounced kicks from her students if the floor is more highly polished.
In the two hours before her class starts, she continually polishes the floor until she has used well over the recommended amount polish for the dance floor. When her students arrive for the class, some of the students express concern about the slipperiness of the floor, but Kath reassures them that the floor is just how it should be and today’s lesson is going to be particularly good. However, Kel, one Kath’s favourite students, does a rather enthusiastic kick and, due to the overly slippery floor, ends up falling rather awkwardly breaking his leg.
- (a) Does a partnership exist? If so, who are the partners?
- (b) From whom can Kel obtain compensation for the personal injuries resulting from Kath’s negligence? Explain.
- (c) Kim has been dating Brett for about a year now, and she decides she also wants to go into business with him in another dance studio that is only 2 streets away from the “Look at me” Dance Studio. Advise Kim.
Will, Dave and Corinne are in a partnership as window repairers. Their business is called “Windows R Us”. Consider the following:
- (a) The business is run from an industrial shed which Dave owns. Dave pays for the upkeep of his shed, and the shed has remained basically unaltered since the business starting using it. However, due to rezoning of the area, the premises have substantially increased in value.
Explain the nature of the property in relation to the partnership and, if the premises is sold, whether profits must be shared.
- (b) Corinne purchases some expensive tinted glass on credit from a glass wholesaler –“Glass House”. Although Corinne actually wants the expensive tinted glass for her own private use (for a home she is building with her boyfriend Rove), she gives the impression to the salesperson at the Glass House that the purchase is on behalf of Windows R Us. Corinne has entered into this transaction on behalf of the partnership even though there was no express authority in the partnership agreement for Corinne to do so.
Who will be liable for the debt incurred by Corinne?
- (c) (i) Dave and Corinne want to continue the business, but Wil is feeling like he wants to do something else with his life now, and thinks he would like to retire from the partnership. Advise Will in relation to what action he should take regarding his liability for debts incurred by the partnership after he ceases to be a partner.
(ii) Unfortunately, before Will makes up his mind as to whether he wants to retire, he dies suddenly. The partnership agreement does not include any provisions relating to the death of a partner. Discuss the impact of Will’s death on the partnership, and what happens with his share of the partnership.
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