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BLW21/MT564 MODULE QUESTIONS Study Period 1 2011 INTRODUCTION It is only possible to cover a limited number of questions in each seminar. The questions are intended to reflect major principles where possible, but in some weeks it has been necessary, due to limited space, to omit questions on important issues. MODULE ONE QUESTION ONE In order to properly work with this unit you need to become proficient in working with the Corporations Act (CA). To commence that process please locate the following references: (a)“Auditors” in the index (b) The definition of “financial records” under CA s9 (c)CA s117 d)CA s124 (e) CA s135(2) (f)CA ss 180(1),(2) (g)Chapter 2E (h) Part 2E. 2 QUESTION TWO Relda Insurance Ltd has received an application from Yendor Pty Ltd to take out an insurance policy covering the motor vehicles driven by the employees of Yendor Pty Ltd. Using the CA and cases, explain whether a company has the legal capacity to: (i) own assets (such as motor vehicles); (ii) enter into a contract (such as an insurance policy); (iii) employ people. QUESTION THREE Premium Plumbing Pty Ltd (Premium) required further capital for expansion and borrowed $200,000 from Eastpac Bank Ltd (Eastpac).

After a time, an unforeseeable misfortune occurred causing Premium to suffer a large loss. It immediately advised Eastpac and stopped trading. Premium is unable to meet the repayments due on its bank loan and has few assets. Eastpac is considering ways to recover its money. Would Eastpac Bank Ltd be successful in enforcing its claim against: (i) the directors, (ii) the shareholders, or (iii) the employees of Premium Plumbing Pty Ltd? [Quote sections and cases to support your opinion] QUESTION FOUR For many years Ali has been the chief chemist with the Pop-a-Pill Drug Company Ltd.

His employment contract in clause 33 requires that in the event of Ali leaving his employment, he will not work “in competition with the Pop-a-Pill Drug Company Ltd for 1 year”. Ali registered an Australian company [Gee Chemicals Pty Ltd] and when he resigned from Pop-a-Pill he immediately became the managing director of Gee Chemicals. Pop-a-Pill claims Ali is in breach of contract. Ali says that Gee Chemicals is in competition with Pop-a-Pill Drug, but he personally is not. Later, Gee Chemicals Pty Ltd is found to be selling drugs in breach of the law.

Ali claims that he is only an employee and that it is the company that has broken the law, not he. Discuss [A detailed discussion of contract law or criminal law is not required here] MODULE TWO QUESTION ONE Wizard Pty Ltd does not have a constitution. Mr Henry Potter owns 1000 shares in the company and attends a meeting of members. The chairperson of the meeting is Wendy Wizard. Henry challenges Wendy’s right to be the chairperson of the members’ meeting and claims that the members should be able to appoint anyone they chose. Wendy rejects Harry’s claim.

Henry claims that the members will remove the directors but Wendy asserts that the members do not have such a power. Determine who is correct on each of these matters. [Clue: Commence by Examining s141 to ascertain the appropriate rule] QUESTION TWO Shareholders of Stones Ltd have been selling parts of their shareholdings, thus increasing the total number of members. The company has no constitution. The managing director, Mick is unhappy about this trend as the cost of maintaining the share register and sending materials to members is increasing.

He wishes to implement a rule to give the directors power to control the transfer of shares so that they can restrict the number of members. Advise Mick if he can successfully achieve his aim. [Note: “Transfer” is the term used to describe the sale or purchase of a share from one shareholder to another. ] QUESTION THREE Julie has been a shareholder in Indahouse Pty Ltd for some years and is upset to receive a letter from the company instructing her to transfer all of her 200 shares to Bob Marley.

Julie makes inquiries and discovers that Bob Marley is a close friend of the Indahouse chairperson Al Gee. She also learns that the company’s constitution contains a rule that provides “the chairperson of the company may, as they see fit, order any member to transfer their shares to any person at a fair market price”. Jimmy, another shareholder, discovers that as the company requires more funds the directors plan to issue a parcel of shares to a single investor without the members being able to participate. Julie does not wish to sell her shares. Is she bound to observe the order she has received?

Are the directors correct in issuing the shares, as they plan? QUESTION FOUR Spears Ltd has a constitution that does not repeal any of the replaceable rules of the CA but does provide for two additional matters: (i) an objects clause provides that “the company’s activities are restricted to the recording and publishing of music”. (ii) another clause provides: “Jackson White is to be the company’s Senior Music Producer at a salary of $200,000 pa”. The directors of Spears Ltd have decided to ignore the constitution and to carry out the following actions: to execute a contract with Little Brother Pty Ltd for the release of films on DVD •to insert into the company’s constitution a clause so that each member will have to purchase an additional 1,000 shares at $3,000 to pay for the new business venture; •to appoint Britney Lance as Senior Music Producer. Required: (a) Spears Ltd loses money under its agreement with Little Brother Pty Ltd and refuses to pay it a sum owing, arguing that it has no legal capacity to release films and that Little Brother legally would have known about its limitations from the Spears Ltd constitution.

Advise Little Brother Pty Ltd. (b)Can the directors amend the constitution? What is the proper process? If the amendment is correctly passed, would the members have to pay for the additional shares? (c) Jackson White writes to Spears Ltd demanding his job back but is told he has no contract. He buys some shares in Spears Ltd and writes again, this time claiming he has a contract. Advise Spears Ltd. [Note:You do not have to consider whether the directors have breached their duties when answering this question. ] QUESTION FIVE Rainbow Ltd is a company that manufactures and sells house paint.

Bill Berger is the Sales Manager responsible for a team of sales representatives. Last week one of the sales representatives was visiting a hardware store when they telephoned Bill to ask if Rainbow Ltd would pay the cost of taking the owner of the store to lunch. Bill gave his approval. Later that afternoon another sales representative telephoned Bill to advise that he had learnt of a new chemical process that would reduce the cost of manufacturing paint. Bill discussed this development with Wally Wattyl, Rainbow Ltd’s Managing Director.

Wally told Bill to check the process out and if he considered it suitable for the company he should buy it. Bill purchased the chemical process on behalf of Rainbow Ltd. The following week Wally went on holiday and the directors asked Bill to look after anything important that may arise in Wally’s absence. Bill signed a lease for a new factory whilst Wally was away. The Board of Directors consider the above transactions. (i) They advise that the company will not pay the restaurant invoice for the lunch as it is company policy that only the Managing Director can approve entertainment expenses and Bill had no authority. ii) The chemical process hardly reduces the cost of paint and Bill had no authority to purchase it. (iii) The company will not comply with the factory lease as it is of a value that requires Board approval and in any event, Bill had no authority to sign it, being only the Sales Manger. REQUIRED: (a)Briefly describe the ways in which a company is able to contract with outsiders. (b)Separately analyse items (i) to (iii) above, describing for each the type of authority (if any) that Bill may have had and whether the company would be bound by each transaction.

MODULE THREE QUESTION ONE (a) What are the differences between cumulative preference share dividend rights and interest payable on debentures. (b) What are redeemable preference shares and from what source can they be redeemed? (c) Equality Ltd has issued 5 million class A shares with 2 votes per share and 1 million class B shares with 3 vote per share. The company has no constitution. At a general meeting, all members vote and by a majority of 10 million votes to 3 million votes, a resolution that all shares are to have the same voting rights, is passed.

Rupert owns some class B shares and seeks your advice. QUESTION TWO (a)Explain the Doctrine of Capital Maintenance. (b)Briefly outline the company processes necessary to undertake the following: (i) Ralph holds 100,000 shares in Rich Ltd and the company wishes to buy-back 1,000 of these at $5. 00 per share. (ii) Each member of Poor Ltd holds 15,000 shares. The company plans to offer to buy-back 10,000 shares from each member. (iii) Massive Ltd is listed on the Australian Stock Exchange and has decided to buy-back 8% of its issued shares through the stock exchange. iv) Cashedup Ltd issued shares for $1. 00 but only called them up to 80 cents. The company no longer believes it will require the uncalled 20 cents per share and wishes to write it off. QUESTION THREE (a) Expansion Ltd wishes to raise $6 million from the issue of shares. It does not want to prepare a prospectus. What are its alternatives? (b) What effect does section 710 CA have over the content of a prospectus? (c) What is meant by the defence of “due diligence” in publishing a disclosure document? QUESTION FOUR Ben has decided he will register a company to grow grapes and produce wine.

He instructs his solicitor to draft a constitution for the proposed company. Whilst waiting for the solicitor to complete the work and before the company is registered, Ben meets a landowner who is prepared to lease suitable land to the proposed company. Ben has to act quickly to secure the land and so he signs a 20 year lease on behalf of the proposed company. The company is later registered and at the first directors’ meeting the ratification of Ben’s lease is considered. Another director offers different land which is of a superior quality for growing grapes. REQUIRED: a) How does corporate law classify the role undertaken by Ben role leading up to the registration of the company. What are the duties that such a person owes and to whom are they owed? Is the solicitor classified the same as Ben? (b) What is the effect on Ben and on the company if the directors decide not to ratify Ben’s lease. MODULE FOUR QUESTION ONE (a)Describe the legal significance of both a share certificate and an entry in a company’s share register. Do share certificates have to be issued for all shareholdings? (b)How does a transfer of shares differ from a transmission of shares?

QUESTION TWO (a) Distinguish a fixed charge from a floating charge. (b) Risky Ltd issues a debenture to Quick Loans for $5 million which is secured by a floating charge over all Risky Ltd’s assets. Six months later, Risky Ltd issues a second $5 million debenture to Shark Finance and this loan is secured by a fixed charge over Risky Ltd’s factory machinery. At a later time, Risky Ltd fails to pay interest owing to Quick Loans and the latter commences to take possession of all the assets, including the factory equipment. Shark Finance claims a right over the factory equipment.

Discuss whether Quick Loans or Shark Finance has priority over the factory equipment under the following circumstances: (a) the Quick Loan debenture charge has a negative pledge clause (b) the Quick Loan debenture charge does not have a negative pledge clause. QUESTION THREE What is a dividend and from where must dividends be paid? MODULE FIVE QUESTION ONE What is the difference between: (a) a managing director and a chair (b) a nominee director and an alternate director QUESTION TWO At a members’ meeting of Construction Ltd the shareholders passed 2 resolutions, each with a 90% majority.

The first was that the company should invest its excess cash in the Hong Kong stock market and the second was to create a constitution with a clause stating that the company’s activities are to be restricted to real estate development and investments. At their next monthly board meeting the directors voted not to invest in the Hong Kong stock market. They also decided that the members had no right to create a constitution and restrict the company’s activities, so they would also ignore the second resolution. REQUIRED:

Are the directors legally required to observe both resolutions of the members in general meeting? QUESTION THREE Kingdom Ltd operates under a combination of its own constitution and the replaceable rules. All the directors of Kingdom Ltd are members of the Windsor family. A group of members are dissatisfied with the performance of the directors and wish to replace two of the board members. At a members’ meeting these members propose a resolution to have the two directors removed and replaced. Liz Windsor, company chairperson, disallows the members’ resolution on the grounds that: i) It does not comply with rule 25 of the company’s constitution – rule 25 states: “no directors of the company can be removed or replaced by the members unless the board of directors agrees”; (ii) It does not comply with rule 26 of the company’s constitution – rule 26 states: “only members of the Windsor family may be appointed directors of the company”; (iii)Under the replaceable rules only directors have the right to appoint new directors; (iv)The directors require 3 months notice of any resolution to remove them. REQUIRED:

Do you agree with each of the grounds used by Liz Windsor to reject the resolution? MODULE SIX QUESTION ONE “For a company director to satisfy their duty of good faith to their company each action taken must result in profit to the company and they must only consider the interests of the company and must ignore those of any other party. ” Do you agree with this viewpoint? QUESTION TWO The directors of Final Ltd have been monitoring for some time the declining sales and profitability of the company. They decide the company should change to a new product range which is predicted to be more profitable.

These new products will require an increase in capital to set up a new factory and the directors make a large share issue to Mick Deadwood to obtain the necessary funds. Lee Lion is a shareholder in Final Ltd. He is unhappy that his shareholding, which represented 26% of the issued shares, has now been diluted to 20% after the share issue to Mick Deadwood. He claims that the directors have issued the shares with the intention to dilute his shareholding so that he will not be able to block alterations to the company’s constitution.

The directors reject Lee’s claim asserting that they only care about the company’s best interests. Lee is considering whether a court would find the share issue invalid. REQUIRED: Describe the directors’ duty that is relevant to these facts. Include cases in your answer and discuss from the facts above those matters that the court would consider important in reaching its decision. MODULE SEVEN QUESTION ONE The directors of Exotica Luggage Ltd are holding their monthly board meeting. In addition to reviewing the company’s monthly financial statements, the directors are to consider two other matters.

The directors of Exotica Luggage Ltd are Louis Viewtown, Priscilla Prada and Jordan Charles. The first is a contract with Emu Leather Pty Ltd for the annual supply of emu leather suitable to be made into handbags. Emu Leather Pty Ltd has a single shareholder Percy Prada, a son of Priscilla. The second matter is for the company to employ Camilla Charles to act as a personal assistant to Jordan Charles (her husband) for 2 afternoons per week. Camilla will be paid $A200 per week for her services. REQUIRED: (a)The Emu Leather Pty Ltd Contract

Applying the provisions of the Corporations Act, advise Priscilla and the other directors of Exotica Luggage Ltd of the procedures they should follow when considering the emu leather contract at the directors’ meeting. (b) The Camilla Charles Contract Applying the provisions of the Corporations Act, advise Jordan Charles and the other directors of Exotica Luggage Ltd of the procedures they should follow when considering the employment of Camilla Charles at the directors’ meeting. QUESTION TWO The directors of Brazil Coffee Ltd are to hold their monthly board meeting next week.

There are 3 directors: Ronald Oh, his brother Robert Oh and Carlos Pele. Ronald Oh has informed the other directors that he will not be able to attend the meeting as he will be representing the company at a rugby tournament in Hong Kong, which is sponsored by Brazil Coffee Ltd. At the board meeting Robert Oh and Carlos Pele decide that the company will enter into its biggest ever contract – a $1 million purchase of coffee beans. The transport insurance premium is so high that it is decided the coffee beans will be shipped from Africa to Australia uninsured. Ronald is advised of these developments upon his return.

The coffee bean supplier was paid $500,000 as an initial payment with the remainder payable within 6 months of delivery. The ship carrying the coffee beans sinks and an examination of the contract reveals that ownership of the goods passed to Brazil Coffee Ltd when the ship was loaded and that insurance was the responsibility of the purchaser. The coffee bean supplier has demanded the remaining $500,000. Brazil Coffee Ltd is unable to pay its debts and a liquidator is appointed. The liquidator is considering whether he should cause Brazil Coffee Ltd to sue its past directors to contribute to the payment of the debt.

He is contemplating whether Ronald has responsibility even though he did not attend the directors’ meeting; that such a large purchase contract should not have been approved by the board; and, that the shipment should have been insured. REQUIRED: With respect to the above facts, discuss: (a) Directors’ duty of care and diligence [Include in your answer, any defences available to the directors]; (b) Whether in your opinion the directors have permitted the company to trade when insolvent [include in your answer, details about the offence of insolvent trading and the defences available].

QUESTION THREE Bananas Pty Ltd manufactures pyjamas and has a successful export business and worldwide recognition for the quality of its products. Benita One is the company’s non-executive Chairperson and Bob Two is the Managing Director. Ted Big is the Marketing Director of the company. Benita has a material importing business and sells her products to Bananas Pty Ltd from which they manufacture their pyjamas. Bob has queried whether this is appropriate but Benita assures him that she is entitled to retain any profit because the prices she charges are fair and competitive.

Further, that as the company’s constitution makes no mention of this whole subject matter she is not prevented from conducting such transactions. Ted Big arranges for his partner Jemima to register a company named TJ Pty Ltd and the company commences to manufacture and sell dressing gowns. Business prospers. Bananas Pty Ltd expands its activities to cover the full range of sleepwear products but finds it difficult to succeed with its dressing gowns as its customers around the world have agreements with TJ Pty Ltd.

A company search at ASIC reveals Jemima as the sole director and shareholder of TJ Pty Ltd. Her home address in the ASIC records leads Bananas Ltd back to Ted and he is confronted with this discovery. Ted contends that he has done nothing wrong as Jemima is entitled to do what she wishes, that TJ Pty Ltd is separate from him, that there was no intention to cause detriment to Bananas Pty Ltd as it was not trading in dressing gowns at the time when TJ Pty Ltd commenced business. Required: (i)Explain whether you agree with Benita’s assessment that she is entitled to retain the profits she has made. ii)Advise Bananas Pty Ltd whether it would succeed in any action against Ted Big. MODULE EIGHT QUESTION ONE The members of Revolution Ltd are dissatisfied with rule 15 of the company’s constitution which gives the directors the power to issue shares to any person as they see fit. The members wish to amend this clause so that the directors must offer any new shares to them first. The directors refuse to hold a general meeting to consider the amendment. REQUIRED: (i)Are the directors entitled to refuse to hold the general meeting? ii)Describe the alternative methods provided in the Corporations Act for the members to place this matter before a members’ meeting for consideration. QUESTION TWO “Under the proper plaintiff rule the members of a company can sue the directors for breach of duty so the statutory derivative action of the CA is unnecessary. ” Do you agree with this viewpoint? Explain the statutory derivative action as provided in the CA. QUESTION THREE Hiphop Pty Ltd (a company without a constitution) distributes music CD’s. Its directors are Spike Hip and Chelsea Hop. Its members are Spike, Chelsea and Fred Flop.

One day Fred hears some exciting new music and inquires into its source. He discovers that the music producer was Rage Records, an organisation that usually used Hiphop Pty Ltd to distribute its music. However, these CD’s had been distributed by a company called SC Pty Ltd. Fred searches company records at ASIC and finds SC Pty Ltd has Spike Hip and Chelsea Hop as its directors. Fred writes to Hiphop challenging the directors over their conflict of interest, claiming that they should give the company the profits SC Pty Ltd has made from their diversion of Hiphop’s business.

Spike and Chelsea call a general meeting of Hiphop Pty Ltd and at the general meeting have the votes to successfully pass a resolution approving their actions, authorising them to continue to divert Hiphop’s business as they see fit and to retain any profits therefrom. Advise Fred on the validity of the resolution passed at the general meeting and whether there is anything a minority shareholder can do. MODULE NINE QUESTION ONE (a)What is a disclosing entity and what additional obligations are imposed on disclosing entities? b)What are the reporting obligations (including deadlines) to the members, and to the regulators, of the following companies – large proprietary companies; unlisted public companies that are not disclosing entities and listed public companies? (c)What obligations do small proprietary companies have to maintain financial records? QUESTION TWO Mickey and Minnie are two of the three directors of Mouse Ltd. The company has 10,000 issued shares, of which 4,000 are held by Fudd Pty Ltd. Elmer, one of the directors of Fudd Pty Ltd, is the third director in Mouse Ltd.

Fudd Pty Ltd plans to make an offer to the shareholders of Mouse Ltd to buy all the shares it does not own in that company. Elmer inadvertently believes he may have alerted Mickey and Minnie to this likelihood. Before any action from Fudd Pty Ltd commences, Mickey and Minnie resolve at a directors’ meeting of Mouse Ltd to issue 5,000 new shares to raise $1million from their rich friend Kiri Pecker to obtain greater funds for future business opportunities. Fudd Pty Ltd is seeking advice over the following matters. REQUIRED: If Fudd Pty Ltd proceeds with its offer, describe how this must be conducted under the Corporations Act.

MODULE TEN QUESTION ONE Describe the main steps in the procedure of voluntary administration and the advantages it is considered to have over other forms of insolvent management. QUESTION TWO Ben is a director of Float-a-way Pty Ltd, a company which specialises in holidays on yachts to exotic Pacific islands. Unfortunately, due to a tidal wave many facilities have been destroyed and the Pacific tourist industry has suffered a significant downturn. Two months ago, Float-a-way Pty Ltd sold one of its luxury yachts to Mary, a director of Float-a-way Pty Ltd for $2,000.

Float-a-way Pty Ltd owed $10,000 to South Pacific Supplies Ltd for provisions supplied to its yachts. This amount was outstanding for many months. Percy, a director of South Pacific Supplies Ltd has been a friend of Ben for some years and Ben had kept Percy informed about Float-a-way Pty Ltd’s financial position. One month ago, Ben arranged for the total amount owing to South Pacific Supplies Ltd to be paid by Float-a-way Pty Ltd. Office Stuff Pty Ltd has leased office equipment to Float-a-way Pty Ltd and there is a lease payment of $2,000 due each month.

The lease has not been paid for 3 months and Office Stuff Pty Ltd has lodged a statutory demand on Float-a-way Pty Ltd. Ben throws the demand away and ignores it. One month after the statutory demand was presented to Float-a-way Pty Ltd, Office Stuff Pty Ltd sought the winding up of Float-a-way Pty Ltd. REQUIRED: (a)Advise whether the Court would be likely to order the winding up of Float-a-way Pty Ltd, following the application of Office Stuff Pty Ltd. (b)If the assets of Float-a-way Pty Ltd are insufficient to meet its debts, are any of the transactions described above voidable under the provisions of the Corporations Act? c)Describe the priorities under which the liquidator should distribute available funds owing to creditors. QUESTION THREE JV Pty Ltd is a company with two members, Joint Ltd and Venture Ltd. Joint and Venture decide they no longer need JV Pty Ltd and decide to wind it up to get their capital back. Describe the steps for this type of winding up and what the effect will be if during the winding up process the liquidator determines that JV has greater debts than assets. QUESTION FOUR What is a receiver and how is a receiver different to a receiver manager? What powers and duties does a receiver/receiver manager have?