Corporate Governance/Directors Duties

Jack McCrae ("Jack") was a director and company secretary of "Side-by-Side Pty Ltd" (Side-by-Side). There were two (2) other directors, Carla Crisp ("Carla") and Edward Elliott ("Edward"). Jack, through his family trust, owned 50% of the 100,000 shares issued. All shares were the same class. Carla and Edward each owned 25,000 shares each.

The directors met on a regular basis but did not consider themselves to be a Board of Directors. At a recent meeting, 30 April 2022, Edward advised the meeting that he had moved house and provided the new address. Jack, as company secretary, was asked to notify the ASIC of the change.

The meeting was also presented with a proposal from Sam Sheedy, a property developer, and an old school friend of Jack. The proposal was for Side-by-Side to purchase land (value $1.2m), that was in the process of being rezoned 'residential'. The rezoning would make the land five (5) times more valuable and would result in the company making a very good profit if sold. Sam had advised Jack privately that there might be some native title issues but if the purchase is approved at the meeting of directors he will pay Jack's family trust, a fee of $150,000 as soon as the purchase is settled. The meeting approved the purchase with Carla dissenting. The funds to settle the land, on 31 May 2022, came from working capital.

Carla believed that the purchase of the land was outside the company's powers. She reviewed the constitution's object clause which contained the following wording:

Clause 4.2 The company may not purchase any assets, including land, on a speculative or 'buy and sell' for profit or gain basis

Clause 6.1 Any purchases by the company over the value of $750,000 requires a unanimous decision of all directors.

The company obtained an independent valuation and decided to adopt the revaluation method of accounting for assets. Based on a successful rezoning of the land Jack decided to accept the new value of the land of $5.2m on 31 August 2022 in the financial accounts for the year ending 30 September 2022. This created a revaluation surplus of $4.4m.

Shareholder	Existing shares	New shares	Dividend payable
JMC Family Trust	50,000	200,000	$2,000,000
Edward Elliott	25,000	100,000	$1,000,000
Carla Crisp	25,000	100,000	$1,000,000

Jack spoke to Edward, and they agreed that the company would issue bonus shares of 4:1 (four shares for each share held at $1 per share) and a dividend of $10 per share held. Carla was not involved in the discussion or decision. The discussion and decision occurred on 28 September 2022. The new issued share accounts and dividend payable amounts would be as follows:

On 30 September 2022, Jack arranged for a short-term loan, secured by the land, to pay the dividends. The terms, negotiated by Jack were as follows:

Loan amount: $4,000,000

Due date: 31 January 2023

Interest: 12% pa

The dividends were paid on 24 October 2022.

On 12 November 2022 a Native Title claim was lodged over the land. Once a claim has been successfully filed and registered with the National Native Title Tribunal, Aboriginal and Torres Strait Islander applicants can claim the right to negotiate against development of the land. The rezoning was put on hold and the new independent valuation of the land was $1.35m. Jack decided that the new revaluation would not be recorded in the financial accounts.

Required:

Discuss any issues relating to the above scenario.