Mr Chao is a well-known horticultural scientist who, after a successful career, decides to start up his own consultancy and to also invest his money in other businesses with other people he knows. He investigates his options including companies, partnerships, trading trusts and franchises.

Mr Chao decides he should start his consulting company first. He incorporates Crop Consultants Limited (CCL) with capital of $1,000 and himself as sole director, shareholder and employee. He hears that a local farm is in difficulty and approaches the farmer with a brochure he has made. It is clearly labelled "Crop Consultants Limited" but sets out Mr Chao's vast experience within the brochure. The farmer is impressed and contracts with CCL (the contract names Crop Consultants Limited as the Consultant). However, in Mr Chao's report to the farmer he negligently recommends the wrong pesticide for the farmers crops. Mr Chao invoices the farmer with an invoice in the name of CCL and the farmer pays. Sometime later the farmers crops fail due to the wrong pesticide being used resulting in a loss of several hundred thousand dollars. The farmer would like to sue CCL but wonders if he can also sue Mr Chao personally.

To make matters worse, Mr Chao was driving a car hired by CCL when he visited the farmer for an inspection and when returning home to the office of CCL he negligently went through a red light and hit another vehicle owned by Stanley. Stanley also wonders if he can sue Mr Chao personally and/or CCL.

Mr Chao buys shares in a company called Good Life Limited (GLL). The constitution of GLL has a clause in it which restricts the activities of the company to doing business in women's fashions and accessories. Since incorporation the company's main products have been up market women's clothing. There are three directors; Bill, Rick and Pam who all have expertise in women's fashion and accessories.

Since the property market has been doing so well recently the board of directors of GLL decide to diversify into property development.The board passes a unanimous resolution to do so and starts inspecting properties for sale. Mr Chao is unaware of these developments.

GLL decides to raise finance for its new venture. It applies to Big Bank (BB) for a large loan. BB has been doing business with GLL for a long time and knows their business and each of the company directors very well due to the many previous dealings they have had. On the day that the loan is approved however Bill and Pam are away. Rick takes the company's senior accountant, Gina to see BB and introduces her as a director. Rick and Gina peruse the bank documentation which states that the purpose of the loan is buy property for development and then sign as directors. The bank receives the signed documents without comment and states it is ready to advance the loan.

Mr Chao learns about this the next day and wonders if the contract with BB is binding on GLL. He also wonders whether he could stop GLL investing in property since they have not yet bought any property.

Mr Chao is also a director and shareholder in a company called Black Knight Limited (BKL) with his two older brothers, Fan and Xu, as directors (and shareholders) and other family members as shareholders. BKL is now considering moving into bigger and more spacious premises because its business is expanding. Fans wife Sarah owns commercial premises and Fan wants the board to agree to buy Sarah's building at a price that seems quite high to Mr Chao.

Mr Chao is concerned that this could be a very good deal for Fan and Sarah but not a good deal for BKL. Mr Chao is also concerned that Fan does not want the other shareholders to know any details about the sale such as price.

Mr Chao decides to start a new company. He launches Luscious Ice Cream Parlours Limited (LIP) a chain of ice cream parlours in Auckland. Mr Chao and his friend Ling, an accountant, are the shareholders and directors. Mr Chao has done a careful analysis drawing on his experience in the food business and believes there is a gap in the market. As the first step in the new venture LIP leased two shops in different parts of Auckland. Ling was concerned about the long term cost of these leases, but Mr Chao assured him that this step was necessary to create a profitable business. Ling accepts this as they have agreed that Ling should do the accounting and Mr Chao should handle the other aspects of the business.

However soon after LIP launched a competitor appears with rival ice cream parlours to LIP. Their ice cream is very competitive with LIP's in both quality and price.

LIP struggle for several months and then receive a statutory demand. This is from an equipment supplier and is for $70,000. Ling's records showed $69,232 was owed but Mr Chao did not want to pay all of that as half of the equipment was defective and had yet to be repaired or replaced by the supplier. At this time accounts drawn up by Ling showed that these demands could be paid by LIP if necessary.

Mr Chao wonders if the statutory demands can be challenged.

LIP struggle financially for several months as Mr Chao and Ling find the competition very fierce and the cost of the two leases LIP has signed consume much of LIP's revenue. The court eventually appoints a liquidator for LIP on a creditor's application. The liquidator immediately begins investigations into whether Mr Chao and/or Ling can be held personally liable for the failure of LIP.

Joshua, a friend of Mr Chao's, has started up a boating shop in Auckland called Joshua Boating Supplies Limited (JBL). JBL sells boats and boating supplies including a range of jet boats. Joshua raised finance through the New Zealand Savings Bank (NZSB) who granted him a $100,000 loan to be secured over all the assets of JBL. Joshua signed the loan papers on the 2^nd of May, the loan was advanced on the 3^rd of May and the bank registered the security interest on the 5^th of May.

Joshua subsequently decided to buy an office computer system to streamline his administrative procedures. He bought a system valued at $8,000 on hire purchase from Top Gun Computers Limited. The hire purchase agreement was signed on the 2^nd of June and Joshua took delivery the next day. Top Gun Computers Limited registered their security interest 5 days after delivery.

JBL cannot stay in business. On the 27^th September Joshua sells a jet boat to a customer takes the money and leaves Auckland. When the NZSB realises what has happened they use their powers under their GSA to appoint a receiver over JBL.

Mr Chao wonders who will take priority over the various competing security interests?

Q: Is the ultra vires doctrine of company law and its effect on the contract entered into between GLL and BB. Giving reasons; discuss whether the contract may or may not be valid under the Companies Act 1993. Can Mr Chao stop GLL investing in property?