Question 1

Fate Pty Ltd (Fate) has five shareholders: Jack, William, Michelle, Janet, and Marie. Jack, William and Marie own 90% of the shares and are also the directors of the company. Janet and Michelle owned 5% of the shares each. Marie is also the company secretary. William is the managing director of company. Over the years, the company flourished and the directors decided to expand the business and discovered that they needed some extra capital. Accordingly, the board of directors passed a resolution to raise capital by issuing debentures to the general public. On the urging of the directors, Jack put an advertisement in Investors Weekly for interested investors detailing the rights and obligations that came with the debenture. Unknown to the rest of the directors, Jack is also a shareholder in several wholesale companies that had a policy to pay bonuses to shareholders who employed their services. Jack always made sure that Fate contracted with these companies. When Janet discovered this, she raised her concern with other directors but no one took her concerns seriously and nothing was done about it. As a result, Janet became very upset and wanted to take action against Jack but she was not sure what her rights in relation to this matter are. William has commenced negotiations with a domestic airline, Octopus, which is in financial trouble (William had heard rumours that Octopus had not completed a number of projects it has signed on to. However, he dismisses such rumours without making further queries). William has signed a contract to pay $10 million with Octopus to purchase one of its aircraft. The board of directors of Fate does not want to be bound by the contract because it is very unlikely that Fate could afford this contract. Advice the company, directors, members and Octopus on their rights and obligations. In case there is a breach of the law, mention the sanctions that will be imposed on the parties. (For this question students should read chapter 11 - 15).

Issue 1: Can a proprietary company offer debenture issues to the general public? Law: State the relevant sections under the Corporations Act. - ss 113(3), 113(3A) and 165. The students need to

Unit 200183 Law of Business Organsiations - Exam Revision Q &A Aut 2021 pg. 2

mention s 113(3), 113(3A) and s 165. and s 700, s761A: regarding definition of securities: shares and debentures.

Application: (Application of the law to the facts in the question.). The directors decided to expand the business and discovered that they needed some extra capital. Accordingly, the board of directors passed a resolution to raise capital by issuing debentures to the general public. On the urging of the directors, Jack put an advertisement in Investors Weekly for interested investors detailing the rights and obligations that came with the debenture. (Discuss the relevant sections under the Corporations Act and apply them to the facts mentioned in given scenario.)

Conclusion: (In the conclusion, student should answer the question posed in the issue).

Issue 2: Has Jack breached directors' duties and acted in conflict of interest?

Law: General law - Equity: Define conflict of interest and explain the duty in this part. Mention 2 very important cases: - Regal case: Directors cannot make secret profit.

Defence: Getting members approval. - Queensland Mines case: Directors should not take corporate opportunity.

Defence: Getting board of directors' approval is enough.

Statute law: s 182, s 191

Application: Jack is a shareholder in several wholesale companies that had a policy to pay bonuses to shareholders who employed their services. Jack always made sure that Fate contracted with these companies. (Discuss if Jack has breached his duties and if he has acted in conflict of interest. You should include a discussion of relevant case law principles here to support your answer. Apply the test for conflict of interest in decided case law.)

Conclusion: ????

Remedy: if any?

Issue 3: What actions are available to Janet?

Law: The question is in relation to derivative action... s 236, s 237

Application: Janet raised her concern with other directors but no one took her concerns seriously and nothing was done about it. Janet wants to take action against Jack but she was not sure what her rights in relation to this matter are. (Explain and discuss the relevant law members' remedies and discuss the relevant case law and sections in the Corporations Act)

Conclusion: ?????

Remedy: ?

Issue 4: Has William breached duty of care or acted in the best interest of the company and for proper purpose? Has he breached directors' duties?

Unit 200183 Law of Business Organsiations - Exam Revision Q &A Aut 2021 pg. 3

Law For breach of Directors' duties - cite the relevant case law and statutes such as sections s180, s181, s182, s183.

Application: William has commenced negotiations with a domestic airline, Octopus, which is in financial trouble. Although William had heard rumours that Octopus had not completed a number of projects. He dismisses such rumours without making further queries. William has signed a contract to pay $10 million with Octopus to purchase one of its aircraft. The board of directors of Fate does not want to be bound by the contract because it is very unlikely that Fate could afford this contract. (Does William have the authority to sign the contract on behalf of the company? Discuss if the liability of the company for the contract signed by William and if William acted in the best interest of the company and breached directors' duties. Refer to Chapter 23, Hanrahan et al, Commercial Application of Company Law, paragraphs [23-480] - [23-590]) Common Law: Daniel v Anderson: Objective test. If you are a non executive director the court will apply an objective test to you. Statute: s 180(1). Also applies an objective test. Same test as under the common law. Defences: - Business Judgement Rule: s 180(2) - Reliance: s 189 - Delegation: s 190(2) Application: Duty of care under Common law has been breached because William did not take reasonable care when entering into the contract. The contract was not beneficial and the company could not afford it. No reasonable person will act in the same way Statutory duty of care also breached because the same test applied as the common law. Defence: No defence apply.

Conclusion: Breach by William of duty of care under common law Remedy: under common law - damages) and stature (civil penalties: students should name them).

Issue 5: is the company bound by the contract signed by William?

Law: For contracts entered into on behalf of the company - the relevant case law and statutes such as s 124, s126 (express implied authority), s127, s128, s129 Irregularity: s 129(4)

Application: Here there is no s 127: the company did not enter directly in the contract. S 126 agency: Here no express authority but there is implied authority: William is the managing director + it does not appear that the company has limited his power. The fact that William may be in breach of his director's duties (see issue 5) will not mean that the contract is invalid since s 129(4) protects the outsider in relation to this matter.

Conclusion: Company bound by contract.