Mary, Fred and Chris agree to start a cafe in Melbourne. In order to save money, they decide to keep it simple and just write down some rules of their agreement on a serviette. They write that they agree to put equal money into the business and to share the profits equally, and that everyone will be involved in the management of the cafe. They start their business, which becomes very popular with the local residents.
1a) Under what type of business structure are Mary, Fred and Chris running the cafe? Give reasons for your answer; in particular support your answer by citing relevant cases and statutes.
Mary, Fred and Chris also buy lots of items for their café, including a brand new Italian coffee machine that costs several thousand dollars. Unfortunately the coffee machine was not worth the money. In fact, the coffee machine produced such hot coffee that one of the customers received second-degree burns on her lips, while she only wanted to enjoy a short black. Chris had served the coffee without checking the temperature regulator on the coffee machine. The regulator is usually set to a medium heat temperature but apparently the thermometer was broken so that the water was, in fact, boiling hot. The customer is so upset that she threatens to sue the café. The customer received second-degree burns that were very painful and which had to be treated medically. Furthermore the customer could not work for a week.
1b) Who would be liable for the damages suffered by the customer? Please make sure that you only assess the legal risks under tort of negligence and support your answer by citing relevant cases.
Based on this experience, Mary, Fred and Chris want to manage their risks much better, in particular limit their liability. They are also in need of some cash and want to raise it by selling shares to families and friends.
2a) What type of business should Mary, Fred and Chris operate now? Again, support your answer by citing relevant cases and statutes.
Unfortunately, the trouble for the business does not end there. Chris, Mary and Fred changed business form and are now all directors of the business.
Chris is upset for being blamed for the incident with the customer and wants to make it up to Mary and Chris. He finds out that the neighbouring shop is available for sale for $120,000 – a prize that he considers a bargain. Chris decides to take out a loan for $150,000 in order to buy the shop and have some spare money for renovation.
The constitution/ replaceable rules of the business state that a director has power to manage the ordinary affairs of the company, however any contract for goods and services (including a loan) exceeding$100,000 must be signed by a director and another person authorised by the board for that purpose.Chris did not discuss this with any of his colleagues before signing the contract.
2b) Is the business bound by the loan contract under the Corporations Act 2001 (Cth)?
2c) Has Chris breached any duties as director under the Corporations Act 2001 (Cth) by taking up the loan?
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