Truth Enterprises Ltd (Truth) is a company that was incorporated in 2008. The constitution of Truth has the following stated object:
“the business of the company is to invest in online retail fashion stores”.
Truth has three directors, Rhonda, Maria and Miranda, who together own 20% of the company’s shares. The remaining shares are split equally between four investors: Mr JJ, Mrs Cale, Mr Giuseppe and Dr Rice.
Since incorporation, Truth has not returned a great deal of profits to members. Mrs Cale, Mr Giuseppe and Dr Rice think they have an idea to greatly enhance the profitability of Truth. They put forth a proposal at a members’ meeting that Truth should purchase a number of high-end retail fashion stores (i.e. “bricks and mortar” businesses).
Rhonda, Maria and Miranda are not keen on the members’ proposal. However, the three directors are informed that they will be removed from the Board if they do not comply with the proposal of Mrs Cale, Mr Giuseppe and Dr Rice. Although Mr JJ does not support them, Mrs Cale, Mr Giuseppe and Dr Rice have sufficient voting power together to action the removal of the three directors. Therefore Rhonda, Maria and Miranda feel compelled to act in accordance with the wishes of the 3 shareholders.
Discuss the consequences of a breach of constitutional objects for Truth Enterprises Ltd and its directors and shareholders, making reference to the relevant sections of the Corporations Act 2001 (Cth) (20 marks).
Fenner Fashions Ltd designs fashion items, including clothing, accessories and cosmetics. Fenner Fashions has three directors on its Board, and these directors are also directors of a subsidiary company of Fenner Fashions called Mean Beanies Pty Ltd (Mean Beanies). The three directors are majority shareholders in both Fenner Fashions and Mean Beanies.
During August of 2019, Mean Beanies contracts with another company, No Sale Pty Ltd, for the purchase of goods to the value of $250,000. In due course, No Sale Pty Ltd fails to deliver the goods to Mean Beanies, and the company does not refund any money to Mean Beanies.
The three directors of Mean Beanies decide not to commence legal action to recover the $250,000 from No Sale Pty Ltd. They simply advise: “it would not be an advisable course of action”. This decision results in a major loss for Mean Beanies that also has a serious financial effect on Fenner Fashions.
The minority members of both Fenner Fashions and Mean Beanies are concerned with the way the company is being run by the 3 directors, and so they seek legal advice.
Question 2: Answer both 2A and B
A). Outline the liability of the directors in terms of their duties under the Corporations Act 2001 (Cth). Have the directors breached their duties to either Fenner Fashions or Mean Beanies?
B). Identity the possible remedies that the minority members could seek against Fenner Fashions and Mean Beanies. Consider whether the minority members are likely to be successful.