HA3021 Corporations Law

Polyester is a director of Style Pty. Limited involved in making women’s clothing.

Situation 1. She arranges with the company’s bank to transfer an amount of $65,000 from the company account into a personal bank account held by her in her own name. She uses the funds to finalise some outstanding personal debts.

Situation 2. As a director she receives information that the company is in a serious financial position. She arranges to transfer a larger amount of the assets of the company over a new proprietary company that she formed with the intention of caring on the same business.

Situation 3. Contrary to a resolution of the Board and notwithstanding established business practice that limits credit to $20,000 she allows a trade debtor (who has a history of bad debts) to exceed its credit limits by $25,000. The debtor fails to pay the outstanding amount of $45,000. Can she rely on the business judgment rule in this situation?

Required: Has she breached any duties under the Corporation Act in the three (3) situations listed above?

Kelvin is considering buying shares in a company. Kelvin asks you to explain to him what is meant by the terms ‘member’ and ‘shareholder’, and the different ways in which a person may become a member. He also asks you to explain who may be eligible to become a member, and how many members a company is permitted to have. Finally, Kelvin asks “How does a person cease to be a member of a company?”

Required: Advise Kelvin.

Borisda Builder Pty Ltd has five (5) directors: Vesna, Sergey, Ilyych, Mikhail and Zviad. Mikhail and Zviad are working directors. They manage the day-to-day operations of Borisda Builder Pty Ltd. The company is engaged in all aspects of home building.

Ilyych is an accountant and he helps out with the production of monthly financial reports for all the directors.

Vesna has attended University and holds an engineering degree and a Masters of Business Administration (MBA). She has a good knowledge of the building industry and the way company finances work.

Sergey is Zviad’s brother and has had a long history of depression and lack of self-esteem. Zviad supported Sergey’s wish to become a board member even though he offered little by way of expertise. Zviad thought that it would help Sergey’s personal development by giving him a different focus.

Borisda Builder Pty Ltd had a record year in 2010. The government’s first home buyer’s grant meant that the company had many building contracts. The directors met in July and decided to pay a dividend of 9c per share.

The company has experienced a severe decline in new contracts in the last two months. This is due in part to a number of cut-price builders offering cheap building contracts. This has placed the company in financial difficulties. Mikhail and Zviad have been with the company since day one and are attached to the company. It is their main focus and provides them with emotional and financial wellbeing.

Sergey has never read any financial statements that have been sent to him. He did not check the company’s financial returns for any of the years before he was appointed and he has never read any reports since he was appointed.

Shareholders of Borisda Builder Pty Ltd number 15 and include the directors and members of the founding family who have held onto shares but take little interest otherwise.

Vesna’s brother Doug has a building design company, Doug the Designer Pty Ltd, and Vesna attends its Board meetings and gives advice. Because of her education and experience the Board of Doug the Designer Pty Ltd follows her directions. Recently, Borisda Builder Pty Ltd contracted with this company. It was Vesna that convinced the rest of the Board of Borisda Builder Pty Ltd to enter this contract. It was Vesna that had collected all the quotes for this work and they all exceeded the Doug the Designer Pty Ltd quote. This was due to the fact that Doug the Designer Pty Ltd had put in a quote below the cost price of the work because Vesna had promised more work from Borisda Builder Pty Ltd in the future.

Ilyych attended a Board meeting a few months ago and brought with him what he believed was a great idea. His proposal was that the company become involved in constructing cubby houses for children out of the leftover materials from around their building sites. The other Board members were not so convinced but Ilyych being an accountant produced some very impressive figures based on information from the company’s files. The board voted against the proposal after Vesna, with her MBA training, argued the company should focus on its main game of house building.

Ilyych is disappointed but yesterday signed a deal with another building company known as Canweafixdat? Pty Ltd. The deal involves Ilyych being paid a commission of 10% for every cubby house sold and a place on their Board.

Borisda Builder Pty Ltd is having financial problems yet the Board continues to allow the company to trade without considering the consequences.

Required:

Discuss the statutory and common law positions of the directors in the case study above.

Joe is a company director in a proprietary company. He is proposing to put a resolution to his company that it buy out the smaller holdings. Joe reasons that there are a number of quite large shareholdings and many of the smaller members have little interest in the company. Joe does not want to force any member to sell their shares but would like to ‘clean up the register’ by buying out the smaller holdings.

Required:

Advise Joe on the legal implications of his plan.

Flywell Ltd is the owner of an Australian domestic airline. The Australian travel market is very competitive. The management of Flywell Ltd is concerned about the plans of a rival airline company intending to expand its Australian domestic operations. The board of directors of Flywell Ltd decides to revamp its fleet of aircraft and purchase extra planes, but the company does not have the capital. Flywell Ltd wishes to induce each investor to invest $10,000 with the company in exchange for shares in the company. The company aims to raise between $9 million and $11 million in new funds. The company has approached you for advice.

Required:

Advise Flywell Ltd of its fundraising obligations under the Corporations Act, paying particular attention to the specified facts