Tutorial Questions and Materials:

Question 1 - Crabtree-Vickers Pty Ltd

Why was the corporation inCrabtree-Vickers Pty Ltd v Australian Direct Main Advertising & Addressing Co Pty Ltd91975) not bound by the contract? How does the Corporations Act deal with such a situation? Why does it address it in this manner?

Question 2 - Munchkins Pty Ltd

Munchkins Pty Ltd (Munchkins) operates three children's clothing shops in Tasmania. On 8 August 2007, Sarah was appointed to the position of Managing Director of Munchkins for a period of two years. A return was lodged with ASIC indicating her appointment as a director on that date. Sarah was not formally reappointed after 8 August 2009, but she has continued to act as Managing Director. No return was lodged following the expiration of her period of office. The terms of Sarah's appointment, which were set out in a contract between her and Munchkins, included a restriction to the effect that she was not to commit the company to borrowing transactions in excess of $20,000. Any such transaction was to remain subject to the approval of the board of directors.

On 20 December 2010 Sarah, purportedly acting on behalf of Munchkins, signed a loan contract with Costello Bank, pursuant to which the Bank agreed to lend the company $30,000 in order to establish a eucalypt plantation. The transaction was not referred to the Board.

The Bank was not aware of either:

• the contents of Sarah's contract, or
• the return lodged by Munchkins at the time of Sarah's appointment.

The Board has since discovered the loan contract and has stopped all repayments on the loan. The Bank has called in the loan and is suing Munchkins for the principal together with all outstanding interest.

a) What do you think the outcome of this case will be?

b) What do you think the outcome of this caseshouldbe?

c) Would the outcome of this case be different if:

• the loan was for refurbishment of two of Munchkins' clothing shops; and
• the bank's loan officer knew Sarah had fallen out of favour with the board and was negotiating a new job?

Question 3 - Vegan and Sustainable Resort Wear Pty Ltd

Lorraine, Hau and Valli are the only shareholders and directors ofVegan and Sustainable Resort Wear Pty Ltdwhich manufactures, distributes and sells vegan sportswear and resort wear. The warehouse which also includes space for the manufacture of clothing and footwear is in Alexandria. The business is run as a sustainable enterprise and has a low level of debt leaving the Alexandria property unencumbered.

Hau is also the Chairperson and majority shareholder ofRural Vistas Pty Ltdwhich is developing rural land for residential use.Rural Vistas Pty Ltdis in need of finance to fund its latest development. However it is already heavily in debt, facing the downturn in the real estate market, and does not have adequate security that it can use as collateral for loans. Further following the findings of the Hayne Commission's Inquiry, financial institutions have been reluctant to bend the rules for Hau andRural Vistas Pty Ltd.

In order to get on with business, Hau borrows $5 million from CBC Bank, promising thatVegan and Sustainable Resort Wear Pty Ltdwould act as guarantor. A mortgage is taken over the Alexandria property by CBC Bank. Hau signs the document as a director and forges Lorraine's signature as another director on the loan documents. Fredirico Pastisi, the loans officer of CBC Bank who has had long term dealings withRural Vistas Pty Ltdand Hau, has some doubts about why a sustainable vegan company would engage in real estate development, but he quells these doubts, after being convinced by Hau that all is in order. The drop in the real estate market continues and Rural Vistas Pty Ltd defaults on the loan to CBC Bank. CBC Bank seeks to enforce the mortgage over the Alexandria property.

Advise CBC Bank.

Question 4 - AI, BigEd and Pre-Incorporation Contracts

A company AI Ltd (which markets computer software) and company BigEd Ltd (which runs a computer training college) enter into an agreement to form a new company, company CriticalTech. CriticalTech is to provide onsite computer training for retail businesses that use AI's software. Shirley (a director AI) and Laverne (a director of BigEd) are authorised by the boards of directors of their respective companies to take, as a matter of urgency, whatever steps are necessary to form CriticalTech and to secure training contracts on its behalf.

Shirley and Laverne instruct solicitors to register CriticalTech as a company. More quickly than they anticipate, they attract a large training job from a company called DesignSkills. Purportedly on behalf of CriticalTech, Shirely and Laverne execute a contract with DesignSkills. They have told the DesignSkills representatives that CriticalTeach is not yet registered. The parties agree to include a clause that provides that if CriticalTeach (or a company reasonably identifiable with it) is not registered within two months of the date of the contract made between DesignSkills and themselves, then DesignSkills can rescind the contract.

Consider these facts in light of each of the following scenarios and questions:

(a) Assume CriticalTech is registered a month after the contract with DesignSkills is executed. What steps must Shirley and Laverne take to ensure that:

the contract with company DesignSkills is binding on CriticalTech; and

neither Shirely nor Laverne are personally liable for the actions of CriticalTeach under the contract.

(b) Assume CriticalTech is not registered within the two-month period. What remedies does DesignSkills have and against whom?

(c) Assume Shirley and Laverne successfully procure the registration CriticalTech. AI Ltd, BigEd Ltd and two individuals (Tom and Jerry) become its shareholders. Shirley and Laverne organise the transfer of assets from their own company (S&L Ltd) to CriticalTech, at grossly inflated values.

CriticalTech becomes insolvent and a liquidator is appointed. Once CriticalTech was registered, neither Shirley nor Laverne have taken any role in the management of the company. Despite this, what remedies might the liquidator still pursue against Shirley and Lavern