1. Briefly consider the consequences for the directors if the venture fails due to a lack of adequate funding, and creditors are owed substantial sums.

Additional information.

Greenfield Fashions Limited is a manufacturer of work clothes which are sold to the farming community through farm supply outlets and by direct marketing to farmers. It has no retail outlets of its own. It has three directors. Two have 40% of the ordinary shares, the third has 20%. The clothing, which is mostly overalls and general farm wear has not been selling well. The directors have discussed the problems facing the company and two of the directors have suggested the need to diversify the product range. They wish to begin manufacturing range of beachwear with an agricultural theme. The company has many creditors which are unpaid. The accounts of the company are not good as the accountant had not been maintaining the records properly. The accountant has been dismissed but it will take some time to reconstruct the accounts and obtain an accurate financial position of the company. To finance the new venture and to repay some of their creditors, the two directors propose to issue shares to an investment company. The shares will be a new class of preference non-voting shares. They will be preferential to dividend and to capital and will also be redeemable at the option of the shareholder after 24 months. As the company has no provision for preference shares, this will require a change to the constitution and the directors have called a shareholders meeting to vote on a change to the constitution. At the shareholders meeting the shareholders vote 80% in favour of the change, with the two directors who each hold 40% of the shares voting in favour, and the third director voting against the change. The directors then hold a Board meeting to issue the shares. The two directors who voted in favour of the change at the shareholder meeting vote to issue the new class of shares. The third director dissents and votes against the share issue. The directors have resolved that the company requires the share issue in order to pay creditors and to start the new range of clothing. The dissenting director feels the investment is inadequate to start a new range of clothing and considers the proposed venture is undervalued and will have risk of failure for the company. He also wants to wait to see what the true financial position of the company is. The two directors who hold 80% of the shares in Greenfield Fashions both have an interest in the investment company and are shareholders of that company.

relevant link.

http://www.legislation.govt.nz/act/public/1993/0105/latest/DLM319570.html

Refer to this companies act as well