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LAWS2301 Company Law

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Question:

Jamie and Paul are the directors of a small Company, Madyou Pty Ltd, which runs a small business videoing wedding and birthday celebrations.  Paul's friend Irene often lines up contracts for the business, oversees the books and gives general day to day advice about which jobs to do and what price to charge.

In November, due to some stiff competition from a new business called Tarantino Pics Pty Ltd, Madyou starts to experience financial troubles.  The rent on the office is overdue by 6 weeks and several suppliers have outstanding bills of several weeks.    On Irene's advice, Madyou  signs a contract with a local bridal magazine for 6 months worth of glossy page long adverts at a total cost of $18,000. This was hoped to bring in more business.

In April, the business deteriorated even further.  The rent was now over 6 months overdue and a long list of bills had not been paid.  On May 2nd the company went into liquidation without having paid for the advertising.

Advise Jamie and Paul on their personal liability for the outstanding debts.  Is there anyone else who might be personally liable

Zapati & Sons Pty Ltd is a family company carrying on the building business commenced in 1959 by Mr Abe Zapati.  The original shareholders were Abe (25%) and his three brothers Bert (25%), Charles (25%) and Dave (25%).  All four brothers were actively involved in the building business.

 Abe and Charles are the two directors and they effectively run the company.  In 1990 Dave died and his shares were inherited by his son Percy, a geologist.  Abe and Charles run the business conservatively and tend to `plough back' profits into the business, so that dividend payments are lower than they could be.  Percy is presently unemployed and relies on his dividend payments to live.  At a general meeting he tried to change the dividend policies of the company but was outvoted by the others.  He would now like to sell his shares in the company (worth about $100,000) but there is a clause in the memorandum prohibiting shares being sold outside the Zapati family.  None of the other Zapatis wish to buy Percy's shares. 

Lee Chan owned a market garden business near Perth.  In December 2006, Lee decided to incorporate.  On 2nd January 2007, Chan and Co Pty Ltd was incorporated, and took over the family business.  The property on which the market gardens are situated, was transferred from Lee to Chan and Co Pty Ltd three months after incorporation.  The consideration was $210,000.

The shareholders consist of Lee, members of his immediate family, and more distant relatives.  There are three directors, Lee's wife, Mary, and Lee's two brothers.  Mary is the managing director and is largely responsible for running the business.

The company's constitution includes the following provision:

"No director shall enter into a contract for an amount of more than $10,000 on the company's behalf without the agreement of at least two thirds of the directors."

In February this year, unbeknown to the board of directors, Mary entered into a contract with Wagmores Ltd, a farm machinery manufacturer, for the purchase of a trailer.  The contract price was $12,000, and the contract was signed by Mary "as managing director, and on behalf of, Chan and Co Pty Ltd".

Lee's niece, Mee-Ling, is a minor shareholder in Chan and Co Pty Ltd and a second year Commerce student.  She has recently discovered some land valuations of the company's market garden property which would suggest that the land Lee transferred to the company was worth no more than $180,000 at that time.

Advise the respective parties of any rights and/or liabilities arising from the above facts.

Mick is company secretary of Export Advisers Pty Ltd, a small company which provides advice to would-be exporters about trade conditions applicable to the country in which their clients wish to establish an export business, and provides lists of potential importers in the country involved.

In August, Chris, the managing director of Engine Power Pty Ltd, a company which manufacturers motor launch engines, approached Mick about Export Advisers providing Engine Power with a list of potential importers in Indonesia, their target export market, and advice as to the best method to approach those on the list.

The director of Export Advisers who usually advised clients about Indonesia and Asia generally, was on holidays at this time and Mick had been instructed to refer any enquiries to Sue, Export's European adviser.  Mick decided to prepare the advice himself as he had visited Indonesia on a number of occasions and considered himself quite knowledgeable about market conditions there.  Mick's advice was delivered to Engine Power on the 15th September.

It now transpires that the list prepared by Mick failed to identify the most likely importer, and that Engine Power's main rival has concluded an agreement with that importer which will effectively exclude any other motor launch engine exporters from the Indonesian market.  Chris has advised Export Advisers that his company intends to sue for breach of contract.  Export maintains that Mick had no authority to make the contract or carry out the work and intends to defend the action on that basis. 

Tim, Lisa and Kate own shares in Homebake Pty Ltd.  Tim and Lisa are directors with Lisa being appointed the Managing director. Carol is the company secretary  and Megan is an employed chef.  Discuss the company's liability with respect to each of the following contracts:

(i) Lisa enters into a contract on behalf of Homebake Pty Ltd with the local school canteen to produce 10 dozen choc chip cookies every Friday. How would your answer change if Tim enters into the contract on the company’s behalf

(ii) Carol enters into 2 contracts in the company's name, (a) to purchase 2 dozen boxes of plain printing paper ("reflex") and (b) to purchase a new fangled highly automatic "Simpsons" cookie cutter.

(iii) Megan, whose tasks include devising and changing the menu, enters into a contract on behalf of the company with Cockatoo Press for the production of 2000 leaflets to be distributed in the metro area.

Rahman and Gill ("R&G") is a large and well known firm of Chartered Public Accountants with offices in each of the Australian capital cities and in 23 other countries.  R&G had a client in Perth called Sail-Time Ltd, a public company with more than 250 shareholders.

Sail-Time manufactured and sold windsurfers and small sailboats in Western Australia.  Last year, at an expense that put them deeply into debt, Sail-Time developed the "Solar Surfer", a novel type of windsurfer that could generate its own wind during sunny but windless conditions.

The financial survival of Sail-Time clearly depended upon the success of the Solar Surfer both in Australia and in the United States export market.

During the audit of last year's Sail-Time Accounts, R&G came across a confidential Sail-Time memorandum from a Sail-Time engineer (since fired) to senior management pointing out a defect in the design of the Solar Surfer.  Also in the records reviewed by R&G was a letter received by the Sail-Time from an American inventor claiming that the Solar Surfer infringed his patent rights.

The R&G audit resulted in a clean and unqualified auditor's report for Sail-Time.  The Audit Report was sent to Sail-Time for inclusion in the annual report that was laid before the Annual General Meeting and filed with the Australian Securities & Investments Commission as a public document.  At Sail-Time's request, R&G also sent a copy of the annual report to a major supplier of the Company, Fibreglass Supply Pty Ltd, who R&G knew were considering selling to Sail-Time on credit.

It turned out that the Solar Surfer had an inherent design defect and also clearly violated a registered Patent in the United States so that it could never have been sold there.

Sail-Time went into receivership and was wound up earlier this year.  Shareholders, including those who bought on the basis of last year's financial statements in the annual report, lost their entire investment.  Creditors, including Fibreglass Supply, lost more that $2,000,000.

(a) Has R&G met its statutory obligations under the Corporations Act

  • Does R&G have potential civil liability in either contract or tort to Sail-Time, the individual shareholders, or Fibreglass Supply and other creditors.
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