Question 2 Dinky Hotels Ltd (Dinky) is a company that develops hotels on the Gold Coast of Australia. The company has been attempting to acquire an old hotel, "The Golden Surf", which is ideally located for re-developing. Lucy is the managing director, Andrew is an executive director and Martin is a non-executive chairman. The company has about 30 investors who mostly live on the Gold Coast. The three directors own the majority of shares in Dinky. The company was thinking of expanding and needed some funds. Lucy put an advertisement in the newspaper and on its website inviting people to invest in the company. She states that the company is issuing shares to general public and that the shares are an excellent investment. Further, the advertisement notes that is an investor would like more information about the company, they can contact the managing director who will send the investor a booklet that contains all necessary information that an investor needs to know before investing in Dinky. 1 Question based on Chapter 22: An overview of External Administration, p 626, Harris, Hargovan and Adams, Australian Corporate Law (1st ed). 2 Lucy and Andrew have not been encouraged to take any risks with new developments of hotels after the company lost $5 million on its last development. In fact, they are genuinely concerned that the shareholders will not support their acquisition of "The Golden Surf" hotel. Due to this fear, at the board meeting, a week before the AGM, it is resolved to not pursue the hotel development until the company is in a better financial position. Martin is upset with this decision and he comes to you for advice regarding whether the shareholders can block the decision of the board to acquire the Golden Surf Hotel. Lucy and Andrew register a new company, Surf Hotels Pty Ltd and make a successful bid for the Golden Surf Hotel. A small shareholder in Dinky, Philip, has found out about the purchase and believes that the company has been ripped off and wants to bring an action against Lucy and Andrew. The constitution of Dinky has the following clause: Luke is the accountant of the company. Luke is a member of Dinky. However he is upset as the company has just terminated his appointment as accountant of the company. He comes to you for advice on whether he can enforce the companys constitution. ASIC initiates three legal actions against the company for different breaches of the corporations law. If a breach of the law is found the company may be liable to pay millions of dollars of compensation. On 1 October 2012, the company is no longer able to meet its debt. Its liabilities by far exceed its assets. The directors keep entering into contracts as they hope that the company may be saved. Martin believes that he cannot be held liable for any breach of duty as he is relying on Lucy and Andrew to make decisions about the company. Lucy and Andrew are experienced businessmen. Given the precarious financial nature of Miner Ltd, on 4 December 2012, Lucy instructed the Accounts Payable Department that invoices from her personal family company (which supplies Dinky with transport services) are not to go through the normal checks and procedures which take 10 working days. They are to be paid immediately upon receipt. She has also convinced the Board that they should register a proprietary company - with the Board of directors as the shareholders as she is worried that the company may lose its case against ASIC. Lucy starts transferring Dinkys main assets to this new entity. She believes that such a move will protect the assets of the company if Dinky goes under liquidation. Discuss the corporate law issues raised by these facts. Solve this question based on the fact that the company went under liquidation on 20 March 2013 after the company lost its case against ASIC. If any breach of the law has occurred, state what are the sanctions that may apply.