1.Miles and Patricia have owned and operated and organic avocado farm on the Sunshine Coast for many years. In 2014 they decided that they wanted to step back from the business and allow their children to get more involved and takeover. As such, they incorporated the company Avocado Smash Pty Ltd (“AS”) and transferred the farm to the company. They then asked their solicitor, Coral, to draft the company constitution. Because of their desire for the company to continue their practice of organic farming, Miles and Patricia asked Coral to include an ‘objects clause’ in the constitution which restricted the activities of the corporation to the organic farming of avocadoes and any related and incidental activities. When drafting the constitution Coral included this clause, along with a clause appointing herself as the company’s solicitor and stating that she could only be dismissed for misconduct. Coral received an allotment of 6% of the shares in the corporation as consideration for drafting the constitution.
When the company was incorporated in late 2014, the board was made up of Miles and Patricia, along with their daughter Alicia (who is also the company’s Chief Financial Officer) and their son Leighton. On the 1st of January 2015, Leighton was appointed Managing Director of AS for a period of three years. The board did not formally reappoint Leighton as Managing Director after the 1st of January 2018, but he continued to act in that position. In March 2018, Leighton arranged for the 2 appointment of Nuala, a recently admitted solicitor and his current girlfriend, as company secretary of AS.
One of the terms of Leighton’s appointment, which were set out in a contract between him and AS, included a restriction to the effect that he was not to commit the company to any transactions in excess of $50,000 without approval by the Board of Directors. Leighton had been looking at ways of expanding the business, and, at the suggestion of Nuala, began investigating turning some of AS’s unused land into the ‘Sunshine Coast Avocado Tourist and Caravan Park’. In July 2018, Leighton began negotiations with Build Em Architects Pty Ltd for plans for tourist and caravan park. On the 1st of August, Leighton signed a contract with Build Em Architects, as managing director along with Nuala as company secretary. The contract was for $150,000 worth of plans to be paid in three instalments. On the 10th of August, Leighton notified Coral that her services were no longer required by AS, as they now had sufficient legal expertise with the appointment of Nuala.
When Alicia received the invoice for the first instalment from Build Em Architects, she raised the contract with Miles and Patricia who were surprised. They called Coral for advice, but she said that she has been dismissed from her role and is about to bring an action against the company for breach of contract.
Advise Miles and Patricia:
A. Whether AS is bound by the contract with Build Em Architects given they believe that:
a. Leighton has exceeded his authority to enter into such agreements; and
b. The agreement is in breach of the objects clause in AS’s constitution;
B. Whether Coral can enforce the clause in the constitution appointing her as company solicitor and what type of remedy would be applicable.
2.Great Games Ltd is a company that manufactures and sells large and exciting outdoor play equipment for adults. The directors of Great Games are Zak, Taylor and Abdullah. Great Games also owns 60% of the shares in Great Adventures Ltd a company that markets exciting adventure packages. Zak, Taylor and Abdullah also sit on the board of Great Adventures, along with two independent non-executive directors (Bethany and Chris). Whilst the two companies are independent from each other, they share a brand image and often advertise their products together as they aim at the same target market.
Whilst Great Adventures is performing well, Great Games is in financial difficulties with outstanding payments on a number of loans with BankEast. At a board meeting of Great Adventures on the 20th of July 2018, the board resolves to provide a loan to Great Games in order for them to make repayments to BankEast. The minutes of the meeting note that the reason for the provision of the loan to Great Games is that: it is in the best interests of Great Adventures for Great Games to continue as a viable entity and any failu
The resolution was passed but both Bethany and Chris voted against it on the basis that they thought that the risk of adverse reputational consequences was minimal. Bethany thought that the real reason for the loan between the companies was that Zak, Taylor and Abdullah were concerned about their reputations as directors of Great Games if the company went under.
Advise Bethany and Chris as to whether Zak, Taylor and Abdullah have breached s181 of the Corporations Act 2001 (Cth), or their equivalent equitable duties to Great Adventures Ltd (including any remedies or penalties that might be applicable).
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