Sample Examination 2

Corporate Law LAWS20029

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Question 70 Marks

You are approached by three clients, Mary, Tom and Tanya, who are partners in a business that imports quality furniture from Europe and sells it in Australia for a considerable profit.They have been considering whether they should incorporate.

Part 1 (10 marks)They seek your advice on the effects of incorporation on their liabilities to third parties.You need to explain the liability of partners to third parties and how incorporation changes this, illustrating your answer with some case law.(You do not need to advise on their 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 the differences between proprietary and public companies and why a proprietary company would be suitable for their business.

Part 3 (10 marks) The clients decide they all will be directors of the company, so you need to advise them on their general law and statutory duties as directors.You should refer to some cases to illustrate the duties.It is not required to consider insolvent trading here.

Part 4 (5 marks) You set up the company for the clients.Each of them is appointed director.Mary and Tom each have 38% of the shares, but Tanya only has 24% because she contributed less capital when the partnership was established.Two years later, they make another appointment to see you.The company has become very successful with a chain of stores across Australia.They want to raise funds for further expansion of the business by issuing shares to the public.You advise them that they would have to change the company to a public company.They seek advice on how to work on this and on the legal requirements for making such an offer to the public.

Sample Examination 2

Corporate Law LAWS20029

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Part 5 (5 marks) They also need advice on what reporting requirements their company will have.

Part 6 (5 marks) They also need advice on what the company's other disclosure obligations will be.

Part 7 (10 marks) The company is successfully floated and shares are issued to the public.A year later, Mary and Tom come to see you.They, along with Tanya, remain as directors of the company.They have learned that just prior to the finalisation of a major contract for the company, Tanya's daughter purchased a large number of the company's shares.The only people who knew about the negotiation of the contract were the directors.You need to give Mary and Tom advice on Tanya's and her daughter's possible liability for insider trading and also any possible breaches of directors' duties.You will need to support your answer with some case law.

Part 8 (5 marks) Mary and Tom also want to pass a members' resolution to force Tanya to sell her shares to them.They seek your advice on whether this would breach s.232 of the Corporations Act 2001.

Part 9 (10 marks) A year later, Mary and Tom come to see you again.They are now the only directors of the company, as Tanya was bought out.The company is going badly.One of the company's major customers has gone into liquidation and left bills of over $1 million owing to the company.The company has suppliers' invoices 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.Mary has an idea that the company can trade out of its difficulties if it orders a large quantity of cheap furniture on credit terms and sells it quickly at bargain prices to generate fast cash.

Part 9 continued over page

Sample Examination 2

Corporate Law LAWS20029

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Part 9 continued

You need to advise Mary and Tom 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 10 (5 marks)

Mary and Tom come to see you a few months later, and tell you that the company has been unable to trade out of its financial difficulties.A creditor has applied to wind up the company.They need brief advice on the role of the liquidator in relation to the assets of the company and payment of creditors.