QUESTION 1

Mick, Mark and Mike are directors and shareholders of MMM Hotels Pty. Ltd. Mick, the founder of the company, owns 80% of the shares while Mark and Mike each own 10% of the shares in the company.

Mick is also a single director and shareholder of CAT Construction Pty Ltd.

Mick convinced the board of MMM Hotels that the company could improve its position by refurbishing and expanding one of its hotels. The expansion required Council approval and a loan of $2.5 million.

Mick sought quotes from other construction companies (which exceeded the quote from CAT Construction) and ensured the quote from CAT Construction is well below these other quotes.

At the Board meeting, Mick showed Mark and Mike various financial figures, prepared by Ned, the newly hired graduate accountant at MMM Hotels and said Ned is confident the company would benefit financially if we go ahead with this. None of the directors understood the financial figures and had not realised the companys cash flow was low and that the loan could lead the company into insolvency. Mark and Mike were unaware that Mick was also a director and shareholder at CAT Construction.

At the Board meeting, Mick further represented that Council approval for this expansion is not a problem our competitors have done similar expansions and have managed to get Council approval in a month or so.

Mark and Mike relied on Micks representations to the Board meeting, as they were excited about the refurbishment and the potential for profits to increase and hence their remuneration to rise accordingly.

Mick had assumed that Council approval would be easily granted and did not attempt to seek approval until after Mark and Mike had signed the contract with CAT Construction. In the meantime, CAT Construction has commenced work and collected an advance payment of $400,000 from MMM Hotels. Two months after the refurbishment commenced, the Council informed him that the approval was not granted. MMM Hotels was struggling to meet its loan repayments and has become insolvent.

Mark and Mike have now realised the true state of affairs and demand that Mick repay the $400,000 to MMM Hotels at the general meeting. Mick being a majority shareholder in the general meeting passes a resolution ratifying the contract with CAT Construction

Answer the following questions:

1. Advise Mick, Mark and Mike whether they have breached any of the directors duties under the Corporations Act 2001 (Cth). 2 marks

2. Advise what if any defences are available to Mick, Mark and Mike 2 marks

3. Advise Mark and Mike what members remedies are suitable for them in the circumstances where Mick being a majority shareholder in the general meeting passes a resolution ratifying the contract with CAT Construction 2 marks

As things transpired, the directors had no alternative but to place MMM Hotels into voluntary administration and it was subsequently placed into liquidation.

4. The liquidator now desires to commence an action against the directors alleging the directors for insolvent trading. Advise 2 marks

5. The liquidator also desires to recover the $400,000 payment to CAT Construction, a related entity to Mick, under Part 5.7B Div 2 of the Corporations Act. Advise