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BLO5540 Business And Company Law

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Question:

1. Food Works Ltd is in the groceries retailing business. It has a board of three directors, Dion and Larry (both executive directors) and Peter (the non-executive director). Only Dion and Larry are shareholders in the company (holding 10% of the shares each) while the remaining shares are held by Raldi Pty Ltd (which holds 80%). Vance, a former founder of the company has stepped down from his previous role as Chief Executive Officer and has taken on the role of ‘Consultant’ and is now a sounding board for the other director (due to his extensive experience in the industry).

In December of 2017, while on a work trip in Europe sourcing business opportunities for Food Works Ltd, Dion met Randy, the CEO of Organica Ltd, a company specialising in the production of organically made food products. Upon further meetings with Randy, Dion discovered that the sales of organic food products in Australia was a very lucrative business opportunity. Dion decided against informing the Board of Food Works Ltd as he believed that some of the Board members would not be interested in sourcing organic food products from Europe due to higher sourcing costs.  Dion had a separate health foods business, Lifestyle Today Ltd, in which he presided as single director and single shareholder and entered into a contract with Organica Ltd to source various organic products. Profits at Lifestyle Today Pty Ltd soared due to greater awareness of healthy eating amongst the younger generation while Food Works Ltd was struggling to stay competitive.

While attending a conference, Peter met Randy and has since discovered that Dion had failed to disclose about the organic food products supply contract to the Board of Food Works Ltd. Peter informs Larry and Vance about this issue who had no knowledge and were surprised to hear about this.

At a recent board meeting, the Board has become aware that Raldi Pty Ltd had launched a takeover bid. Vance has recommended to the Board that they should issue further shares to Dion and Larry. The result of this, is that the shareholding of Raldi Pty Ltd would be diluted, hence blocking the takeover. There was no urgent need at the time for Food Works Ltd to raise capital.

Further, at the same board meeting, Vance recommended that in a desperate attempt to improve profitability of its existing brands, Food Works Ltd should spend an additional $100,000 on media advertising and marketing. Due to his extensive industry experience, Dion and Larry concurred with this strategy. Peter, however, reviewed the cash flow statement and after discussions with Rita, the accountant highlighted to the others that the company was already having some cash flow problems (being on the brink of insolvency) and that investing in further advertising and marketing was not a good idea. Dion, Larry and Vance who are very optimistic, argue for the advertising to continue as in their view the company was not yet ‘insolvent’.  A resolution is passed that the company should continue its aggressive advertising and marketing efforts for another year. After a few months, the company’s capital has run dry.

Questions:

(a)Advise whether any of the persons mentioned above have breached the directors’ duties regime in the Corporations Act 2001(Cth). Please refer to relevant case law authorities in support of your discussion.

(b)Advise if any defences are available to any of the above persons in the circumstances.

(c)Advise what penalties (under the Corporations Act 2001 (Cth)) and common law remedies are available if a breach of directors’ duties is found.

2. Carpets Galore Pty Ltd, is a family-owned importer and retailer of luxury carpets. There are four directors (all siblings): Caitlin, Ben, Sarah and David. Ben and David, hold 80% of the shares between them with Caitlin and Sarah each holding 10% of the shares.

Over the past couple of months, Caitlin and Sarah have found the other directors to not be receptive to their views on any major decisions. Caitlin and Sarah want the family business to diversify into sales of designer rugs as well but the others resisted the idea of diversification as it was not part of the business plan and it diverted resources away from the carpet business. Caitlin and Sarah have since learnt that Ben and David have held some board meetings which they did not inform them of, where important business decisions were made.

These decisions at the aforementioned meetings included the following:

  1. The approval of pay rises for Ben and David  (but not for Caitlin and Sarah)
  2. Despite the company’s increased profits, the decision not to declare a dividend yet again (the company having not declared dividends in the prior 2 years despite being profitable).
  3. The ratification of the sale of four of the retail outlets belonging to Carpets Galore Pty Ltd to Household Mania Pty Ltd, a company at which Ben is founder and director at. No independent valuations of the retail outlets had been obtained and the sale price was considerably less than the market price.

Differences of opinion have become rather acute such that the relationship between Caitlin and Sarah and the other two brothers is now quite acrimonious. Key decisions about management of the business are difficult to achieve.

Advise Caitlin and Sarah whether any member remedies are available under the Corporations Act 2001(Cth). Please refer to relevant case authorities in support of your discussion.

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