James and Cathy enter into an agreement to promote and sell hand blended perfumes. James agrees to provide the finances and Cathy agrees to identify suppliers and customers. James and Cathy agree to share profits equally. Initial sales of the hand blended perfumes were excellent, but James and Cathy became overwhelmed with the level of commitment involved in running the business. They both had full time jobs and families and were finding it difficult to give time to the business. They approach Pip and Lou, directors of Bebe Ltd - a high end retailer. Was Bebe Ltd interested in purchasing their business? One facet of the Bebe Ltd store business was perfumes, which were decanted by store assistants into crystal bottles at customers' requests. Pip had a strong background in business and enjoyed her role as Chair of the Board. Lou, a nonexecutive director, had previously worked in Paris as a 'nose' (perfume developer) for a French boutique. At the end of 2018 Bebe Ltd agreed to purchase their hand blended perfumes business and James and Cathy became shareholders (they did not take on a directorship of the company). For most of 2018, Bebe had struggled financially as Australia's taste for luxury goods seemed to evaporate. At the start of 2019, Lou treated herself to a trip (private holiday) to Hawaii to clear her mind. While she was there, she found a small boutique that sold perfumed hand blended massage oils. One of these (based on the gardenia flower) was said to have herbal and floral remedial properties. Lou bought a large amount of this oil and gained a discount price for it due to her bulk purchase. On returning to Australia, Lou began using the perfumed massage oil at her small proprietary company she established which offered therapy and massage treatments. On returning from holidays, Lou contacted Pip, who made a number of suggestions about Bebe Ltd. First, Pip suggested changing the focus of the business so that it was more like a mainstream department store and less high-end and specialised. Lou said she found this strange given that most people in the retail sector were predicting 2019 would be a bumper year and that the 'big end of town' would 'splurge' again to make up for the restraint they had recently shown. Pip replied: "I know it seems strange, but my new business analyst and demographer said that series of predictions would be proven incorrect." Around the same time, rumours commence that an interstate luxury retailer is considering a takeover of Bebe Ltd. Pip considers issuing more shares to protect the company from a takeover.

Question 1: Advise Pip and Lou on all the legal issues in this case. [20 marks]

Question 2: James and Cathy, as minority shareholders, became concerned about the activities of the directors and if the company has missed out on the profits. Advise James and Cathy if the directors have breached their duties to the company and how they can ensure the company take legal action to recover the loss of profits. [20 marks]

Follow below format & details:

Director statutory duties - S180, S181, S182 , S183, S189 Corporation Act

Case law -ASIC V Rich, ASIC V Adler, Daniels V Anderson, Howard Smith v Amphol Petroleum, Regal Hastings v Gulliver (corporate opportunity doctrine)

S232, S233 - minority members remedies

S236, 237 - derivative action on behalf of company by members

S461(1)(K)- Just and equitable winging up-Ebrahimi V Westbourne

Issue 1

The issue in part 1 of the question deals with whether the directions had breached any statutory or common law duties.

Relevant law

S 180 - Care and Diligence (includes Business judgement rule)

General law:-

Care, skill & diligence:

Daniels v Anderson

Sheahan v Verco

South Australia v Clark

ASIC v Rich

Permanent Building Society v Wheeler

Vines v ASIC

Explain and discuss S180(1) duties of due diligence and care- Objective test. Citation, ASIC V Adler (2003), ASIC V Rich, Daniels V Anderson

Diligence is meaning informed, committed and skilled. S180(1), degree of care and diligence required is that which is reasonable in the company's circumstances, taking into account the directors responsibilitiesASIC V Adler.

, ASIC V Adler (2003- A chair of a listed company is responsible to a greater extent that any other director for ensuring the board is properly informed, familiar with the financial circumstance of the company and the board properly meets its supervisory duties. Chair has special responsibilities.

Explain S180(2) , business judgement defence and state how a director could avoid liability for breach of the S180(1) duty

S 181 - Good Faith

General Law

Good faith in the best interests of the company:

ASIC v Adler

Use power for a proper purpose:

Howard Smith v Ampol

explain S181(1) duty of good faith and acting in the best interest of the company; explain also the common law duty of corporate opportunity and conflict of interest ; Regal Hastings V Gulliver(1967)

(The directors who breached their duty were acting in good faith and they did nothing that harmed the company-on the contrary the company benefited from their actions.Nonetheless they breached this duty because they made profit.Personal profits and improper use of position. Case involved honest dealings vy directors.However, the court held that directors were liable from the mere fact of having a profit)

Explain S181(1) duty to act for the proper purpose; Howard Smith V Amphol Petroleum(1974)

(An issue to create a new majority shareholder was invalid. Two companies were in takeover battle for Miller. The Miller Board was sympathetic to second company and issue share so as to dilute the other company's shareholding.Even through the second company's offer meant shareholders got a better price the issue of shares was still invalid and was held to be breach of duty. Motivated primarily to reduce shareholding.)

S 182 - Improper use of Position; Regal and Adler

S 183 - Improper Use of information; Vizard

Directory duties : REMEDIES

Compensation or damages

Account of profits

Rescission of contract

Return of property - construction trust

Civil Penalty Provisions

Court declaration of contravention; s 1317E

Pecuniary penalty up to $200,000; s 1317G

Disqualification order; s 206C

Compensation to company; s 1317H

Criminal liability

S 184 for breach of ss 181, 182 and 183 (reckless or intentionally dishonest) - penalty $220,000 and/or 5 years imprisonment

General Law:-

Avoid conflicts of interest and disclosure:

ASIC v Adler

Explain S189 the duty to make decision independently

S 189 Reliance on others-defence

Director duty : RELIEF FOR BREACH

General Law

Ratification by general meeting

Relief from liability s 1318 - acted honestly and in the circumstances the person should be excused for the contravention (Court grants relief)

STATUTORY LAW

Relief from liability s 1317S - acted honestly and in the circumstances the person should be excused for the contravention (Court grants relief)

Application and analysis

S180 breach could have been done by Pip and Lou when they decided to covert to a new business without making a proper business judgement.

S181 breach could have occurred when Lou travelled on 'private trip' to finally start her own business; not acting in good faith and in the best interest of the company.

S181 improper purpose doctrine could have been breached when Pip decided to issue shares for the purpose of preventing a takeover.Issuing a share which are within the powers of directors has to be done for a proper purpose. Howard Smith V Amphol Petroleum

Issue 2

The issue in part 2of the question deals with whether .....

Relevant law

S232, S233 - minority members remedies

S236, 237 - derivative action on behalf of company by members

S461(1)(K)- Just and equitable winging up-Ebrahimi V Westbourne

Discuss S232 and S233 oppression remedies and S236 and S237 derivative action.

Action on behalf of the company against the directors wrongdoing....

and possibly S461(1)(K) for the winding up of the company based on just and equitable grounds

S237(2) are the requirements to meet for the permission to take legal action against the directors on behalf of the company - statutory derivative action

Explain S232

Explain S233

Explain S236 permssion order

S237(2) are the requirements to meet for the permission to take legal action against the directors on behalf of the company - statutory derivative action

Application and analysis

Conclusion