LAW302 Tutorial Questions and Exercises (March 2018)

Tutorial 1: Introduction to the Law of Business Organisations

1. Get out a blank piece of paper and take 5 minutes to do a ‘brainstorm’ on business organisations.
What pops into your head when you think ‘business organisation’? Large, public companies? Work
(many or most of us are employees of business organisations)? Companies becoming insolvent
(several large corporate collapses have occurred in recent times)? Perhaps environmental
damage, due to mining for example? Money, including other people’s money? Think broadly.

2. Reflect on your brainstorm. How might law affect the things you have noted? Are you aware of
laws dealing with any issues you may have written down during your brainstorm? What are your
perceptions of the law’s ability to handle or resolve issues you have noted during your brainstorm.

3. What is a ‘stakeholder’ in relation to a business organisation? How might the interests of different
stakeholders vary depending on their relationship to the business organisation?

4. Can law facilitate the formation or enhancement of business organisations? Alternatively, does law
inhibit business activity; or can law do both, depending on the context?

Tutorial 2: Partnership and Trust Law

1. What are the three elements of the definition of a partnership in s 1 of the Partnership Act 1892 (NSW)
(henceforth the Partnership Act)? Must each be satisfied in order for a partnership to exist?

2. What were the facts, the decision and the reasons for the decision in the Canny Gabriel Castle
Jackson Advertising Pty Ltd and Fourth Media Management Pty Ltd v Volume Sales (Finance Pty Ltd
(1974) 131 CLR 321 (‘Canny Gabriel’)?

3. How does a joint venture differ from a partnership? How does the decision in Canny Gabriel assist us
in understanding this?

4. What sections of the Partnership Act are relevant to determining whether a partnership exists? How
is each relevant?

5. What, in legal terms, is the relationship of partners to one another? Does a partner owe any legal duty
to the other partner/s?

6. What is an agent? How is the concept of agency relevant to partnership? How does this affect a
partner’s liability for the acts of his or her fellow partners?

7. How might a partnership come to an end? Briefly describe the possible circumstances in which this
might happen.

Problem questions

1. Barry carries on business as a window dresser. He employs Bruce to assist him. After 2 years, Barry
decides that Bruce is such good company and such an excellent employee that he wants to pay him,
in addition to his wages, a share of all future profits. At the time he suggests this to Bruce, Barry
explains that the business cannot afford to increase Bruce’s wages, and that the only way the
business can continue to support the two of them is if Bruce is able to bring in some clients. Bruce is
aware that Barry has had difficulties of late paying his business creditors.

Should Bruce accept Barry’s offer? Could this arrangement cause Bruce to become Barry’s partner?
If so, what consequences would follow?

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2. B and C owned a block of flats as tenants in common. The letting of the flats was handled by H
Estate Agency who paid all outgoings in connection with the flats, including maintenance costs, and
forwarded the net proceeds to B and C monthly. B and C shared these receipts equally. Unknown to
C, B arranged with D to supply and lay new carpet in two of the flats. D has been unable to obtain
payment from B and seeks your advice on taking action against B and C jointly.

3. A and B are partners in a newsagency business. C, a wholesale stationer, is friendly with A and
offers him 5% commission on all purchases made by the partnership. C pays this commission to A
by cheque, monthly, and A deposits it in his personal account. Some time later B discovers the
arrangement. Advise B.

4. Marge, Maree and Myrtle operate a trucking partnership. Marge, who has no idea how to run a
business, has done the following acts without the knowledge of the other partners:-

a) She has mortgaged two trucks, and a block of land owned by the firm, to secure a loan of
$50,000. This money has been used by the firm.

b) She has purchased on credit in the firm's name:

i) Christmas presents for Maree and Myrtle

ii) 200 new tyres for the firm's fleet of 7 trucks.

c) She has employed a new driver who crashes the firm's truck into a neighbouring fence on his first
day on the job. It is then discovered he has never driven a truck before. The repair bill for the
fence is $1,000.

d) She has drawn several partnership cheques to pay for her groceries.

To what extent are (i) Maree and Myrtle liable, and (ii) is Marge liable to Maree and Myrtle in respect of
the above? Could Marge be expelled from all future participation in partnership management?

Tutorial 3: The Constitutional & Regulatory Framework of the Corporations Act

Consider the following questions while you complete the reading for this topic. Ensure that by the time you
have completed the set reading that you can answer these questions, noting any relevant sources of law
(eg. cases and/or statutory provisions). If you cannot, you should re-read the relevant section of the
reading, and try to answer the question again. Please raise any issues you still do not understand in class.
By doing this, you will help everybody in the class to acquire a better understanding of the subject.

1. What is the source of the Federal parliament’s power to make laws with respect to corporations?
How has this power caused difficulties in corporate regulation, particularly in recent times?

2. What is meant by ‘referral of power’? What significant agreement concerning referral of power was
reached in 2000?

3. What is the role of the Australian Securities and Investments Commission (ASIC)?

4. How is ASIC funded? To whom is it accountable?

5. What are the essential accounting and reporting requirements for small and large proprietary
companies and for public companies?

6. What policy objectives are the requirements for preparation and publication of corporate accounts
aimed at achieving? Do you think they achieve these objectives?

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7. In what circumstances might an auditor face liability to the company they are auditing or to third
parties relying on the audited reports of a company?

8. The directors of Mitchell Ltd were looking for a suitable investment for money received from a
recent sale of property belonging to Mitchell Ltd and delegated the task of finding a suitable
investment to Alex, the head of Mitchell Ltd’s financial department. Alex investigated several
potential investments, and narrowed his choice down to two, a public company called Electrical
Australia Ltd, and units in an investment trust. Alex telephoned Electrical Australia Ltd and spoke to
the company secretary, who offered to send to Alex a full copy of Electrical Australia Ltd’s audited
financial reports, prepared by an auditing firm called Hannons, for the previous two financial years.
Alex duly received the full audited accounts and after reading them decided that investing in Electrical
Australia Ltd would provide the best return for Mitchell Ltd’s investment. He recommended to the
directors that they have Mitchell Ltd purchase 50,000 shares in Electrical Australia Ltd through the
Australian Stock Exchange. However, six months after Mitchell Ltd purchased the shares, Electrical
Australia Ltd went into voluntary administration. It transpired that there had been a discrepancy in the
accounts of Electrical Australia Ltd and the company had in fact been in serious financial difficulty for
the previous eighteen months. The audit should have revealed the true state of affairs of the
company.

Mitchell Ltd, which has lost its entire investment, seeks your advice as to the likelihood of success of
legal action against Hannons, the auditors of Electrical Australia Ltd.

Tutorial 4: The Corporation as a Separate Legal Entity

1. What consequences follow from a company being a separate legal entity?

2. If a company owes money, who is responsible for that debt?

3. What were the facts in Salomon’s case? What was the decision in this case and why is it important?

4. When can the corporate veil be lifted under the Corporations Act to make directors liable for
corporate debts?

5. When can the corporate veil be lifted at common law? Summarise the circumstances under which
the courts may do this and provide a case authority for each.

6. How might companies be related? How is a subsidiary company defined?

7. When can the corporate veil be lifted at common law and under the Corporations Act in corporate
groups? Summarise the relevant circumstances.

8. What sections of the Corporations Act are civil penalty provisions? What do those sections deal
with? Why do you think they have been made civil penalty provisions? What is unique about such
a provision?

9. Anton is a director of a company which is in serious financial difficulty, and he fears the company
is nearing insolvency. Advise Anton as to the circumstances in which s 588G applies, and of any
steps he could take to ensure he would have a defence to a s 588G action if this action were
commenced against him. What penalties could he face if he does contravene s 588G? Please
consider s588GA as well, in relation to his potential liability for insolvent trading.

10. John is a developer who has previously bought land at a council auction. Under the council’s
contract for the purchase of land there is a clause that provides that no person who has
purchased land from the council is eligible to bid for further land from the council in the next 5

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 years from the date of the purchase. In order to be eligible to bid at the next council auction,
John forms a proprietary company limited by shares. In every respect, the company adheres to all
the provisions of the Corporations Act. John and his wife are the sole shareholders of the
company, and they are its sole directors. John attends the auction and successfully bids for a
block of land. The council has refused to go through with the sale because John had bought a
block of land before.

John brings an action for specific performance against the Council saying that it was not he who
was the successful bidder, but the company. Discuss the likelihood of success of this argument,
assessing arguments that may be made by the council.

11. Goldsworthy Developments Ltd established a subsidiary, Hitech Ltd, to develop and market
telecommunications products. Goldsworthy made extremely favourable loans to Hitech in order to
fund its research program. A prospectus was issued and Goldsworthy’s interest was reduced to a
40% shareholding, however it retained three of its board members on the Hitech board. There are
five directors on the Hitech board. Hitech was well-reviewed in industry journals, but its sales
projections were not met because of a lack of promotion and it continued to be a heavily indebted
company dependent on Goldsworthy’s continued financial support.

If Hitech was trading whilst insolvent, could Goldsworthy face liability for Hitech’s debts although it
is a separate legal entity? Why or why not?

Tutorial 5: Getting the Company Started

1. What types of companies can be formed under the Corporations Act? What are the key features
of each?

2. Is it possible to convert from one type of company to another? If so, how?

3. What are the steps involved in registering a company? Briefly outline the registration process in
point form.

4. What is a promoter? What do they do? Explain the nature of the duties promoters owe to the
company they are forming.

5. How can you tell when a contract is a pre-registration contract? Who may face liability for a pre-
registration contract and in what circumstances might they face liability?

6. Explain the role of the company’s constitution and the replaceable rules. Is it possible to be
governed by a combination of both a constitution and the replaceable rules?

7. Briefly explain the procedure for the modification/ alteration or repeal of the company’s constitution.
In what circumstances might an alteration be declared invalid by the courts?

8. What is the nature of the ’statutory contract’ created by the company’s constitution (if any) and the
replaceable rules? Who are the parties to such a contract?

9. Sylvia and Tom decided to form a new company. They approached Ralph, an accountant and a
friend, to complete the registration process for them. Ralph agreed to do so, in return for a small
parcel of shares that Ralph would be free to do with as he pleased after the company was formed.
Sylvia and Tom also asked Ralph about finding investors for their new company. Ralph offered to
talk to two of his clients that he knew were looking for investments. Sylvia and Tom agreed to pay
Ralph an additional amount of 3% of the amount invested by Ralph’s clients once the company is
registered. Tom also asked Ralph to keep an eye out for suitable office space for the company.

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 Ralph owned a two-story office building from which he carried on his accounting business, and
suggested to Sylvia and Tom that they rent part of the lower floor of the building as office space from
him, on behalf of the proposed company, at $500 per week. This rental price is $100 per week more
than the actual rental value of the property.

Advise Ralph as to what his relationship to the new company is, and whether he could face liability if
Sylvia and Tom discovered the extra profit he was making from the rental of the office premises.

10. Leo and Melanie decided to incorporate a company, to be called Halcyon Daze Pty Ltd, to carry on
their new business as Internet service providers. Immediately the decision was made, Leo signed a
lease of premises for the new business in his own name. The company was registered, and the
business was conducted from the new premises.

Is the company liable to pay the rent for the premises? Give reasons for your answer.

11. Read the Gambotto v WCP Ltd (1995) 182 CLR 432 case extract in the eLearning readings for this
week, then answer these questions:

• What were the facts of this case?

• Which court decided this case?

• What was the decision?

• What was the reason for the court’s decision?

• What is the legal principle in this case to be applied in future cases similar to Gambotto?

12. Alouette, Bernice and Candy are the directors of Austral Ltd. Fred and Greg are registered
shareholders and together hold approximately 20 per cent of the company’s shares. Over the last
five years, Fred and Greg have continually brought frivolous and vexatious lawsuits against the
company, the directors and each other. The company, as a result, has been hindered in its
management and the price of its shares has been declining.

The company’s constitution was altered by special resolution of the company in general meeting,
largely at the instigation of Alouette, Bernice and Candy. The constitution now gives the current
directors of the company the power to compulsorily acquire the shares of any member at a fair price.
Alouette, Bernice and Candy have informed Fred and Greg that they intend to exercise this power to
acquire Fred and Greg’s shares.

Using the legal principle from Gambotto, provide advice to Fred and Greg as to whether they could
argue that the alteration made to the company’s constitution in this case is invalid. In your answer,
ensure that you

• identify the relevant legal principle and state the appropriate legal authority
• develop an argument based on an application of this principle to the facts of the case
• identify any opposing arguments
• form an opinion as to the likelihood of success of Fred and Greg’s case

Tutorial 6: Company Finance

Consider the following questions while you complete the reading for this topic. Ensure that by the time
you have completed the set reading that you can answer these questions, noting any relevant sources of
law (eg. cases and/or statutory provisions). If you cannot, you should re-read the relevant section of the
reading, and try to answer the question again. Please raise any issues you still do not understand in
class. By doing this, you will help everybody in the class to acquire a better understanding of the subject.

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1. What is the difference between debt financing and equity financing? What factors might affect a
company’s choice of debt or equity financing?

2. What is a share?

3. What are the different types of shares? What are the key features of each type?

4. What are some examples of debt financing? Why is security important in debt financing?

5. What is a security interest?

6. What is a disclosure document? When is a disclosure document required?

7. What information must be included in a disclosure document?

8. What are the consequences of a breach of the disclosure provisions in the Corporations Act? Are
defences available for breach of the provisions? If so, briefly outline these defences.

9. What is the doctrine of maintenance of capital? Who does it seek to protect?

10. How is the maintenance of capital doctrine given effect in the Corporations Act?

11. What may cause a reduction of capital, contrary to the maintenance of capital doctrine? Provide
examples.

12. What is a dividend? When can a dividend be paid? When might payment of a dividend breach
the maintenance of capital doctrine?

13. This is a past exam question, worth 15 marks. Students would have had approx. 45-50 minutes to
complete it.

Jack has applied to purchase shares in Grape Ltd, a wine-making company, after reading Grape Ltd’s
prospectus. The prospectus included a statement signed by Anton, Belinda and Cathy, the directors
of Grape Ltd, which stated that Grape Ltd was in the process of purchasing land in Victoria, and
guaranteed that Grape Ltd would own the land by the beginning of the next harvesting season; and
that the land had already been planted with grape vines and would produce fruit in the next season
ready for winemaking. The prospectus also contained a statement by Xavier, who had just completed
a wine-making course at TAFE, that the grapes harvested in the coming season would be suitable for
making wine. Cathy became concerned about the purchase of land and the suitability of the grapes
soon after the prospectus was published, and took out an advertisement in the local metropolitan
newspaper withdrawing her consent to the prospectus.

Grape allotted 2500 shares to Jack, and Grape Ltd’s shares were also listed on the stock exchange.
Since the allotment and listing of Grape Ltd’s shares, it has become apparent that the purchase by
Grape Ltd of the property would not go through until the end of the harvesting season, and that in any
case, the grapes being grown were unsuitable for wine-making. The shares of Grape Ltd have fallen
to less than 25 cents per share and are in danger of being delisted.

Advise Jack of whether there are any common law and/or statutory remedies available to him against
Anton, Belinda, Cathy or Xavier to assist him to recover the money he has lost due to his investment
in Grape Ltd.

14. “Both the common law and the statutory provisions in the Corporations Act relating to the maintenance
of the company’s capital reflect an appropriate balance between providing protection for creditors of a
corporation and providing flexibility for the board of directors in managing the company.”

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 Give your reasons for agreeing or disagreeing with the above statement

Topic 7: External Relations: The Company’s Relations with Outsiders

1. In what general areas of law may a company find itself liable?

2. How does a company act, given that it has no mind or body of its own?

3. Who might be an agent of the company (recall what an agent is from our consideration of
partnership law)?

4. What types of authority might an agent of the company have? How do these types of authority
arise? Describe the nature of the different types of authority.

5. How are decisions in a company made? How is a company run on a daily basis?

6. What is delegated authority? Who may delegate authority in a company?

7. What is meant by the term ‘outsider’ in this topic? How does the law protect outsiders dealing with
companies? In what circumstances might outsiders lose this protection?

8. Aaron and Ben are the directors of Luxury Reef Cruises Pty Ltd (‘Luxury’). The main business of
the company involves taking tourists out to the Great Barrier Reef for cruises and snorkelling. In
the middle of the summer tourist season, a ship owned by Gold Coast Transport Ltd (‘Transport’)
ran aground on the reef. It was several days before the ship could be removed from the reef and
the damage assessed. During this time, Luxury could not operate cruises in the area and lost
revenue as a result. Aaron and Ben are considering bringing an action against Transport for
damages to compensate Luxury for lost revenue. In addition, damage was done to the reef. Dean,
the authorised officer in charge of the investigation into the accident, is considering whether
charges should be laid under s 24A of the Environment Protection and Biodiversity Conservation
Act 1999 (Cth) for action that has a significant impact on the environment, and, if so, against whom
these charges should be laid. Initial investigations of how Transport’s ship ran aground indicate
that the crew of the ship (employees of Transport) had not kept a sufficient watch when they were
nearing the reef (there was even a suggestion that the captain was intoxicated at the time).
However, Dean also suspects that the ship was understaffed at the time, due to a directive from
the managing director of Transport, not to replace any crew who were on leave or who resigned
because the company was having cash flow problems.

(a) On what bases might the company be liable in tort to Luxury if sued for lost revenue? Should the
company be liable in these circumstances? Consider the basic purposes of civil law (compensation
and deterrence) in your answer.

(b) Should Dean lay charges under s 24A of the Environment Protection and Biodiversity Act 1999
(Cth)? Against whom should these charges be laid? Consider the basic purposes of criminal law
(punishment and deterrence) in your answer.

9. Health Foods Ltd is a wholesale supplier of packaged organic food products and vitamin
supplements for sale to retail health food stores. Kyle, Liz and Mike are the directors of the
company. Jason was the company secretary of Health Foods Ltd, but Kyle and Liz, outvoting
Mike, had removed Jason from this position at a recent board of directors meeting. However,
they had not yet lodged the appropriate notice of this with ASIC under s 205B(5). Mike decided it
would be a good idea to diversify the company's business interests by expanding into the actual

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 growing of organic food. He saw an advertisement in the local paper for the lease of a market
garden from Kim and made an offer to lease it on behalf of the company. Mike signed the lease
documents as director and Jason signed as company secretary. Kim actually knew Jason, as
they had attended high school together. While they were checking the paperwork before signing
the lease documents, Jason asked Kim if she knew of anyone who was employing people at the
moment, since he was looking a job. Kim thought he must have been planning to leave Health
Foods Ltd and resign as company secretary. At the board meeting the following month, Mike
informed Kyle and Liz of the lease of the market garden and his plans for production of organic
vegetables. Kyle and Liz became upset with Mike for entering into this lease without consulting
them and refused to make any payments under the lease.

Is Health Foods Ltd bound by the contract for the lease of the market garden? Refer to case law
and/or provisions of the Corporations Act as relevant to support your answer.

Topic 8: Directors and Officers (Company Controllers)

1. How is a person appointed to be a director? How might they be removed from this position?

2. Under what circumstances might a person be disqualified from being a director of a company?

3. To whom do the directors duties provisions in the Corporations Act apply? Does the application of
these provisions extend more broadly to other company controllers?

4. How might you identify whether conduct engaged in by a director is a breach of his/her fiduciary
duty or a breach of his/her duty of care to the company?

5. What types of conduct by a director may be classified as a breach of his or her fiduciary duty?
Guidance may be found in the cases on directors duties.

6. What were the facts, the decision, and the reasoning of the majority of the Court of Appeal in
Daniels v Anderson (the AWA case)? See the extract from this case in the eLearning readings.

7. Shortly after its takeover of Luxury Goods Ltd the directors of Koyoto Ltd decided to increase their
remuneration by $50,000 to $130,000 per annum to bring it into line with that paid to the directors
of Luxury Goods. At about the same time a new managing director was appointed at an annual
remuneration of $1.5 million. Jack Dempsey has a small shareholding in Koyoto and is outraged
by these pay increases. Advise Jack as whether there is anything he can do to have these
decisions reversed, and more reasonable amounts of remuneration paid. (Koyoto has adopted
the replaceable rules.)

8. Tonnetti Ltd (“Tonnetti”) is an investment company, its primary activity being investment in real
estate on the outskirts of Sydney. Last year, Sacci and Anderson, two directors of Tonnetti, on
behalf of the company, approached Farmers Ltd (“Farmers”) a large national company interested
in land development, with a view to the two companies entering into a joint venture to acquire and
develop land in the vicinity of Sydney. After preliminary negotiations, Farmers said it was
unwilling to deal with Tonnetti (this was because Farmer’s controlling shareholder had some time
ago suspected his wife was having an affair with Bob Jones, Tonnetti’s other director) and would
deal only with Sacci and Anderson personally. Sacci, Anderson and Farmers incorporated a
company, Newvilla Pty Ltd, which acquired land in the vicinity of Sydney for development
purposes. This activity in no way affected Sacci and Anderson’s high quality services to Tonnetti.
Indeed it improved their financial position so they did not need to seek increased remuneration
from the company, and provided them with good experience enabling them to spot some great
opportunities for Tonetti which the company made a very healthy profit on. The shares in
Tonnetti were held in three equal parcels by each of the three directors. Recently, Bob sold his

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 shares to Judson Pty Ltd and a new director was appointed to Tonnetti’s board. When the new
director saw some correspondence relating to the company’s negotiations with Farmers and
discovered the current situation he threatened legal proceedings on behalf of Tonetti against
Sacci, Anderson and Newvilla unless Sacci and Anderson transferred their shares in Newvilla to
Tonnetti.

Do the above facts disclose a breach of duty on the part of Sacci and Anderson? Give reasons
for your response, referring to case and/or statute law as relevant.

9. The main business of Builders Ltd was real estate development. Builders Ltd had five directors.
Maria was Builders Ltd’s Managing Director. At a board meeting of Builder Ltd a year ago, Maria
presented the following proposal for the board’s consideration: ‘Builders Ltd should purchase a
prime property located in Wollongong CBD for purposes of building a new shopping mall.’ Maria
knew that Western Construction Ltd, a competitor of Builders Ltd, was also interested in buying the
same property. Western Construction approached Maria and offered her an all-expenses-paid trip
to Europe and $150,000 if she made sure that Builders Ltd made a low offer for the prime property
in Wollongong.

Maria prepared an appraisal report on the value of the prime property in Wollongong using outdate
data, and convinced the directors of Builders Ltd to make an unrealistic low offer for the prime
property. The offer was rejected by the owner of the property who ultimately sold it to Western
Construction.
a. Has Maria contravened the Corporations Act 2001 (Cth) Please explain why or why not.
b. If the law has been contravened, what actions can be brought against Maria and by whom?

Refer to relevant case law and/or legislation in your answer. Question from 2012 Final Exam

Topic 9: Meetings, Members and Minority Rights

1. Why are companies required to hold meetings under the Corporations Act? Why are some companies
required to hold an Annual General Meetings (AGM), for instance, while others are not?

2. What is a proxy? Why are they used?

3. Are shareholders entitled to regular information relating to the performance of those who control the
enterprise, and to inquire when they suspect something may be awry or are generally unhappy with
the performance of the company? What does the Corporations Act have to say about this?

4. What are the common law legal rights of a member? What rights are still available or useful in light of
statutory development in the area of members’ rights?

5. Where do we find the statutory derivative action provisions in the corporations law? Why is a statutory
derivative action preferable to a common law derivative action? Is the latter still available?

6. Design a table or flow chart to summarise the statutory legal rights given to members and how they
work. See if you can use it to help you address the seminar questions. It might be useful in your
preparations for the exam, or to help you if you get an exam question on members’ rights!

7. "A share is personal property however a shareholder may experience difficulty defending the value of
her shares."

Explain the difficulties a shareholder may face.

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8. The directors of Ripitout Mining NL decide to sell a mine owned by the company at a price which is
substantially less than the real value of the mine. The majority of the shares in Ripitout Mining NL are
owned by Large, Vicious and Lovingit Pty Ltd and these two companies have common directors.
Weedy is a minority shareholder in Ripitout Mining NL and wants to know what steps can be taken to
protect her interest.

Advise Weedy. How would your advice differ if Weedy suspected that the directors were selling the
mine to raise finance for the company to invest in a chain of video shops?

9. Hick Pty Ltd was formed to carry on a family business, and has adopted the replaceable rules. Whinger
and Grumble are members of the company and are angry about the lack of dividends, the failure of
directors to submit financial reports, and the refusal of directors to hold annual general meetings.
Whinger and Grumble strongly suspect that the directors wish to purchase their shares at a cheap and
undervalued price. At the end of the last financial year, the company was classified as a small
proprietary company pursuant to s 45A of the Corporations Act 2001 (Cth).

Advise Whinger and Grumble.

10. The following question is from the 2003 examination (worth 15 marks):

Paul, Sam, and Tina are the directors and shareholders of Exotic Places Pty Ltd ('Exotic'), a travel
company. Each holds 25 % of the shares in the company. The remaining 25% of shares are held by
five persons, each with 5% of the shares. Due to recent international events and the associated
decrease in international tourism, the company is having some financial difficulties, although Exotic is
not yet insolvent and has reasonable cash reserves on which to draw if necessary.

Paul and Sam have had enough of the tourist and travel industries and wish to get out of the business.
They decide that Exotic should lend $40,000 of the company's cash reserves to a new business, which
is owned by Paul and Sam's wives, at an interest rate of 3.5% per annum. At the board of directors
meeting called to decide this matter, Tina expresses concern about the loan, stating that she believes
the company should be consolidating its current activities and maintaining its cash reserves rather than
making a loan to a new and unproven business. Paul and Sam outvote Tina and the loan is given to
Paul and Sam's wives for their new business. Paul and Sam subsequently remove Tina from the board
of directors (in accordance with s 203C). Tina is furious about these actions, believing that that the
loan will cause Exotic to become insolvent and that Paul and Sam are trying to prevent her from having
a say in the company.

Advise Tina as to what she can do, as a minority member of Exotic, to prevent the loan from going
ahead; to have Exotic take legal action against Paul and Sam for breach of their duties to Exotic; and
to have herself reinstated as a director of Exotic.

Refer to case law and/or the Corporations Act as relevant to support your answer.

11. Five years ago,Tom, Dick and Harry were equal partners in the business of car washing in Sydney.
In February last year, they decided to carry on business as a proprietary company. Accordingly, they
formed Car Wash Pty. Ltd, which adopted the replaceable rules. Each had 100 $1 shares. All three
were directors and all profits were distributed by way of salary to directors.

In November last year a dispute arose because Tom and Dick wished to diversify by opening a chain
of hair dressing salons in Dubbo. Harry dissented vigorously and as a result Tom and Dick convened
a general meeting of shareholders and removed him from the Board. Harry now wishes to sell his
shares but the Board refuses to allow him to transfer the shares to an outsider, and the Board refuses
to pay more than one dollar per share. Car Wash Pty. Ltd. has a net asset value of $30,000.

Advise Harry of his rights at common law and under the Corporations Act.

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Topic 10: The Company in Financial Difficulties

1. Identify the stakeholders whose interests may be affected if a company is in financial difficulties.
Explain how their interests are or may be affected. Are these stakeholders adequately protected by
the provisions in the Corporations Act dealing with companies in financial difficulties? Continue to refer
back to this question as you progress through the topic.

2. What are the policy objectives sought to be attained by the voluntary administration provisions in the
Corporations Act? Do the provisions appear to achieve these objectives? Explain why or why not.

3. What is the process to be followed when a company is placed in voluntary administration? When
does voluntary administration end?

4. In what circumstances and by whom can a company be wound up in insolvency?

5. Outline the powers, duties and liabilities of a liquidator in a winding-up.

6. Lee Brown was appointed receiver of Fernleigh Enterprises Pty Ltd, with the usual powers of such an
office. Fernleigh's shoe manufacturing division in Berkeley had been running at a loss for several
years, the overall business of the company sustained by its other divisions. Lee considered the sale
of the real estate on which the shoe manufacturing plant was located would provide sufficient assets
to pay off imminent debts and enable the company to continue trading. Lee engaged Handover Real
Estate in Sydney as exclusive agent for the sale. Handover sold the property to the first buyer who
came along for $100,000. Equivalent undeveloped light industrial land was selling for $100,000.
Fernleigh's directors considered the property was worth more because it was developed. Advise the
directors.

7. Draw a diagram that shows and explains all the possibilities that a liquidator might pursue to get in
assets for distribution in a winding up. Be creative!

8. On 1st June, a statutory demand was served on Deedee Pty Ltd, and the winding up application
was filed on 1st July. The application was granted and the relevant orders made on 15 September.
Following an investigation of the affairs of Deedee, the liquidator uncovered the following:

(a) On 1st March, Delilah (managing director and majority shareholder of Deedee) gave her
daughter Sammy $20,000 from company funds as a twenty-first birthday present. Sammy
purchased a car with the money. Delilah uses the car whenever she wishes, as Sammy lives
at her home. Sammy still owned the car at 15 September.
(b) On 10th April, Delilah told Michael, a creditor of Deedee, to whom the company owed $10,000
that Deedee was hopelessly insolvent and would not be able to pay the full amount and thus
got the creditor to accept 50cents in the dollar in full and final satisfaction of the debt;
(c) On 15th October, Delilah transferred the bulk of her shares in Deedee to Harvey, her ex-
husband, for $20,000;
(d) Deedee had operated on a $100,000 overdraft from Advanced Bank for several years and paid
the interest regularly until December the previous year, when, for three months, no interest was
paid. On 25th February, Deedee paid $30,000 to the bank by way of reduction of its overdraft.
Delilah was personally liable under a guarantee for the amount of the overdraft.
(e) The company’s plant and equipment and cash at bank were worth about $50,000 and creditors
(not including Michael) were owed $200,000.

Discuss the law in relation to the above factual situation and determine what steps the liquidator might
take to recover further moneys available for distribution.

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9. Starship Ventures Ltd was established to manufacture and market the Unicorn Starship, a satellite
repair vehicle. When Starship had almost saturated the market for such vehicles, it began
researching a new product so as to be able to maintain its production staff and profitability. The
company has spent $5 million so far on the new product, but its sales of Unicorn is dropping off at
a rate that suggests it will not be able to pay its debts as they fall due.

Advise the board of Starship as to its options.

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