Legal Application and Analysis of Companies Act 1993, Financial Markets Conduct Act, and Credit Cont

Dividend Distribution under Companies Act 1993

1. Solvency Amiri and Benjamin are directors of Lawnies Limited, a company that manufactures lawnmowers and gardening equipment. On 30 June 2021, the board resolved to pay a dividend of $30,000 to Lawnies’ shareholders, Benjamin and Jayendra. Amiri and Benjamin signed the necessary directors certificate immediately after the resolution was passed. The resolution provided for payment of the dividend on 15 July 2021.

At the time the resolution was passed:

• Lawnies had fixed assets of $300,000, and current assets of $100,000. Current assets comprised $25,000 stock, and $75,000 accounts receivable. Of the accounts receivable, $50,000 is due on 20 June 2021 and $25,000 is due on 20 July 2021.

• Lawnies had current liabilities of $80,000 and long-term liabilities of $280,000. The current liabilities are mainly payments due to suppliers, $40,000 is payable on 20 June 2021 and $40,000 on 20 July 2021.

• Benjamin and Amiri had heard that there is likely to be a delay in the payment they are expecting on 20 June 2021. In order to avoid unauthorised overdraft, they decide to defer the first payment of $40,000 to July. They don’t discuss this delay with their
suppliers.

• When passing the resolution, Amiri and Benjamin referred to the Excel spreadsheets that they use to keep track of things.

On 20 June 2021 Amiri had received a call from Mable, Lawnies’ agent in the US. Mable told him that there had been an accident with one of the lawnmowers, and it seems there might have been an issue with the brakes. Amiri and Benjamin agreed to meet the cost of repair of the defective lawnmower. They are a bit concerned that the issue with the brakes could be more widespread, and that they might have to recall lawnmowers. They have been intending to take out recall insurance, but have not yet done so. The company does have public indemnity insurance that will cover any litigation costs.

On 5 July 2021 Amiri and Benjamin receive a further report from Mable about other brake failures, and they investigate further. They discover that one of their suppliers has used the wrong materials. Their engineer advises that they should institute a recall programme, to mitigate the potential of lawsuits. They also need to urgently rework their existing stock.

They estimate that the cost of the recall will be between $50,000 and $150,000, depending on how many people respond.
Refer to the relevant provisions in the Companies Act 1993 to answer these questions.

Shares Offer under Financial Markets Conduct Act

(a) Outline the legal test that must be applied to determine whether the board may authorise the distribution. (5 marks)

(b) Apply the law to the relevant facts to determine whether the distribution was validly authorised. (17 marks)

(c) Assume the dividend is paid. Benjamin has used his share of the dividend to reduce his overdraft. Jayendra has used his as a down payment on a new car. Can the dividend be recovered from Benjamin or Jayendra as shareholders? (8 marks)

[Question 1 total: 30 marks]

2: Financial Markets Conduct Act Business is going well for Lawnies Ltd, and there is increased demand for their products.
The managing director, Amiri, decides to raise capital so the company can expand its manufacturing capability. Amiri does not want the expense of producing a disclosure statement, so decides to directly invite potential investors to purchase shares. He wants to make direct offers to a number of people without bothering with disclosure. For each of the people below, apply the relevant law to determine whether Amiri can make an offer to them without making disclosure.

a) Mohammed Mathews. Mr Mathews is studying business law and he certifies himself as an eligible investor. (4 marks)

b) Shoshana Simons. Amiri met Ms Simons through an angel investor network. (3 marks)

c) Brian Blather. Brian is an engineer who develops new product. He has been employed by Lawnies since the business opened some years ago and Amiri is keen to recognise his long service by including him in the offer. (5 marks)

[Question 2 total:12 marks]

3: Credit Contracts Lawnies Ltd is a successful business that manufactures gardening equipment. The business is producing popular products and its director, Amiri, decides to develop a ‘home and garden warehouse shop’ where purchasers can view and purchase his products. He has found the perfect property for the development, but the company does not have the money to purchase the property or finance the project.

Amiri approaches Harriet, who is prominent in local business circles, and who has financed other similar projects. Harriet agrees to finance the development. They agree to a term loan of $500,000, at a fixed interest rate of 15% to be repaid within 24 months.
Penalty interest is payable on any amount still owing after 24 months. Harriet takes a first mortgage over the property and a personal guarantee from Amiri to secure the loan.

The project does not go to plan. Eighteen months later Amiri asks Harriet for an extension for a further 12 months. Harriet agrees on condition that Amiri provides further security. Harriet takes a first mortgage over Amiri’s house to secure Amiri’s obligations under the guarantee.

Lawnies continues to struggle and misses an interest payment or two. But Amiri gets the project back on track, and towards the end of the three years, Amiri contacts Harriet to discuss arrangements for repayment of the loan and discharge of the mortgages and guarantee. He says that Lawnies should be able to repay half the principal at the end of the three years, and the rest within a further three months. He has confirmed buyers for his products and the warehouse is doing well.

Harriet tells him that the missed interest payments were the final straw, and she’s decided to enforce her security. She tells him she has instructed her lawyer to issue the required notices, so she can sell Lawnies’ warehouse land and Amiri’s own house.
Amiri feels that the contract should be reopened on the grounds of oppression.

Apply the relevant provisions of the Credit Contracts Act to determine whether there is a claim for oppression. In addition to relying on the Act, at least one case should be considered. In coming to a conclusion, your answer should explain when a court can reopen a contract, and separately consider.18 marks)

[Question 3 total:18 marks]