Question 1 (2000 words maximum)
Fawlty Trucks Pty Ltd carries on an interstate trucking business in Brisbane. It has two directors: Basil, the managing director, and his wife Sybil, who is also the company’s secretary. Apart from its fleet of trucks, the company also owns the house where the directors live.
Basil and Sybil’s marriage has broken down and they have separated. Sybil continues to live at the house and is not involved in the day-to-day operations of the company’s business. Basil lives in a hotel with his son, Manuel.
Three months ago Basil, without telling his wife, borrowed $500,000 from Eastpac Bank. The money was for his personally use. There was no commercial advantage for Fawlty Trucks Pty Ltd in the loan. The loan was secured by a first mortgage over Fawlty Trucks Pty Ltd’s house, occupied by Sybil. The mortgage was executed under the company’s seal, witnessed by Basil as director and Manuel as company secretary. However, contrary to the company’s constitution, board of directors’ approval had not been obtained for the mortgage. At the time the mortgage executed, Basil told the Eastpac Bank manager who approved the loan that Sybil had resigned as company secretary and that Manuel has been appointed to that position, which was not true. Basil then took the $500,000 and disappeared with Manuel to Barcelona. Sybil has now been made aware that Basil mortgaged the house. She tells Eastpac Bank that Fawlty Trucks Pty Ltd was not bound by the mortgage.
(1) Advise Eastpac Bank on whether or not it can hold Fawlty Trucks liable. (10 marks)
(2) Sometime after the dispute with Eastpac Bank was resolved, Fawlty Trucks had been experiencing extreme financial difficulties and its financial records were a hopeless mess. It was continually late in paying debts owed to its suppliers and employees’ wages. With Christmas coming up, its directors were uncertain as to what appropriate actions should be taken. The main creditors of Fawlty Trucks were:
Bank A, which was owned $10,000. The loan was unsecured.
Bank B, which was owned $1 million. Bank B was granted a security interest over substantially the whole of the assets of Fawlty Trucks.
Advise how would the company itself, the directors of the company, and Bank A and Bank B referred to above be affected if Fawlty Trucks were placed in voluntary administration? Would your answer be different if Fawlty Trucks were wound up in insolvency?
(3) Research and communication skills
Question 2 (2000 words maximum)
Blizard Ltd (Blizard) operates a gold mine in Perth. It has four members who are Harold (who holds 30% of the shares), Gary (who holds 30% of the shares), Marie (who holds 30% of the shares) and Johnson (who holds 10% of the shares). Marie is the managing director and Gary is the chairman of the company. Harold was appointed as a non-executive director of Blizard as a favour to Marie. Harold has never read any financial statements that have been sent to him. He has an understanding that he will not be involved in the affairs of the company and he will rely on Marie to advise him on any relevant issues that he needs to be aware of. Blizard is investigating the possibility of extending the mine beyond its current footprint after hearing reports that a competing mine, Super Pit mine, is planning a major expansion.
Accordingly, Blizard commissioned a report from Earthwork, an engineering firm to assess the viability of extending the operation of its gold mine. The report noted that the carbon footprint and the electricity needs of this expansion would be massive and as a result the expansion is not commercially viable. Further, the company’s auditor, Mike, also wrote a report in relation to this matter and he noted that the company would need more capital to be able to pay for such an expansion.
Despite of the auditor’s report and the Earthwork’s recommendation, the directors pass a resolution to go ahead with the expansion. During the meeting that passed the resolution, Gary asked Marie to summarise the Earthwork and the auditor’s reports because he did not have time to read the reports. He noted that he relied on Marie to provide him with the information. Marie stated confidently that the expansion would be a huge success irrespective of the reports and Gary voted in favour of the decision. As the directors were anxious to leave, Gary allowed only 10 minutes for Marie to present her business plan for the proposed expansion. Marie and Harold both voted in favour of the resolution. Without disclosure, Marie later convinced the rest of the board of Blizard to enter into a large amount of commercial contract with her husband’s company, Borisda Ltd. The expansion was unsuccessful and the company, while remaining solvent, suffered a huge financial loss.
When Johnson discovered this, he became dissatisfied with the affairs of the company, and questioned the board. The board resented Johnson’s questions and proposed to buy his shares at half of the market value. Johnson refused. Later, the board of directors called for a members meeting to change the company’s constitution to allow anyone who has more than 30% of the shares to expropriate the shares of Johnson, claiming that was to reduce the administrative cost of the company. The resolution was passed with a majority of 90% and the change of the constitution took effect. As a result, Johnson’s shares were expropriated at half of the market value. However, Johnson believed that the change of the constitution was invalid.
You as a professional accountant are asked to write a formal letter to advise the directors and Johnson about their rights and/or liabilities under the Corporations Act 2001 (Cth).
You should use both primary and secondary sources, e.g. legislation, case law, text books, journal articles and websites, to demonstrate your research skills in support of your advice in the letter.
Letter format and communication