Question 70 Marks

You are approached by three clients, Misha, Tanya and Irving, who are partners in an IT business that produces software for appliances and for machinery used in factories.They sell software, both on its own and also ready-loaded onto hardware appliances, so their sales include both software and hardware.The business has become successful, so they have been considering whether they should incorporate, but they don't know much about it.

Part 1(10 marks)

You need to explain to the clients the benefits of incorporation, and compare it to their risk exposure while operating as a partnership.You particularly need to address their potential liability to third parties, and the effect of the corporate shield.You should refer to appropriate cases to illustrate your advice.Since the clients are only concerned with their external liabilities, you SHOULD NOT address issues of rights and duties amongst themselves.

Part 2 (5 marks)

On hearing your advice, the clients decide to go ahead with incorporation.You need to explain to them how to incorporate and what are the roles of directors and shareholders.DO NOT explain the duties of directors here, since it is explained in the next part.

Part 3 (10 marks)

Now you should explain the general law and statutory duties of directors.You should refer to some cases to illustrate the duties.It is NOT REQUIRED to consider insolvent trading here.

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Part 4 (5 marks)

You set up the company for the clients and they go away happy.Each of them is appointed director. Misha and Tanya have 40% of the shares, but Irving only has 20% because he was only a junior partner and made a smaller capital contribution when the partnership was established.Three years later, they make another appointment to see you.The company has become so successful they are thinking of floating on the stock exchange.They seek a BRIEF SUMMARY of the legal requirements for making a large share offer to the public.

Part 5 (10 marks)

You also need to give them a summary of the disclosure and reporting requirements for public companies.

Part 6 (10 marks)

The company is successfully floated and shares are issued to the public.A year later, Misha and Tanya come and see you on their own.They, along with Irving, remain as directors of the company.They are concerned that Irving may be passing confidential information to friends about the company's contractual negotiations so that the friends can trade profitably in the company's shares or get relatives to trade in the company's shares.You need to give Misha and Tanya advice on Irving's possible criminal liability for insider trading and also any possible breaches of his directors' duties.You will want to support your answer with some case law.

Part 7 (5 marks)

Misha and Tanya also want your advice on whether they can pass a members' resolution to force Irving to sell his shares to them, and what are the restrictions on that.You should elaborate your advice by referring to at least one case.It is sufficient to address the common law/equity on this.(NO NEED to consider s.232 of the Corporations Act 2001.)

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Part 8 (10 marks)

A year later, Misha and Tanya come to see you again.They are now the only directors of the company, as Irving was bought out.The company is going badly.One of the company's major corporate customers has gone into liquidation and left unpaid bills of over $1 million owing to the company.The company has suppliers' invoices for parts and hardware due at the end of the month, and as a result of the customer's default, there will be insufficient cash to pay the suppliers.Misha has an idea that the company will be able to trade out of its difficulties if it orders a large quantity of computers on credit terms and sells them rapidly at bargain prices to generate fast cash.

You need to advise Misha and Tanya on:i. their exposure to personal liability in this situation; ii. a solution that would allow the company to trade out of its difficulties without the directors incurring personal liability.

Part 9 (5 marks)

Misha and Tanya come to see you a few months later, and tell you that the company has been unable to trade out of its financial difficulties.They need advice on the effect of a winding up on their role as directors, the assets of the company and payment of the company's debts.