Victorian Building Holdings Pty Ltd (VBH) is a company duly incorporated under the Corporations Act 2001 (Cth) (Corporations Act). Abdul, Benita and Charlie are the directors and each holds 30 ordinary shares in VBH. The directors of VBH decide to branch out into another area of business, timber framing, and establish another company as a wholly owned subsidiary to carry out the business in order to quarantine risk. Timber Framing Solutions Pty Ltd (TFS) is duly incorporated, and Abdul, Benita and Charlie are appointed as the directors. 100 ordinary shares in TFS are issued to VBH. The directors decide to appoint Danny, who is a carpenter and a long-serving employee of VBH, as the chief executive officer (CEO).

Under Danny's leadership, TFS proves to be very successful and he wishes to expand the company's operations. Abdul and Charlie have little interest in the day to day running of TFS, being content to let Danny to conduct its operations. Danny negotiates the terms of a lease for a larger factory with Property Holdings Ltd, and also negotiates a contract with Timber Supply Solutions Pty Ltd for the supply of timber. Contracts are prepared to give effect to the terms that have been negotiated with these companies, and Danny and Benita sign these contracts on behalf of TFS.

Given its increased profitability, TFS attracts interest from buyers. VBH receives an offer to sell TFS for a price of $10 million. The directors agree, and upon settlement the ordinary shares held by VBH in TFS are transferred to the buyer, Consolidated Holdings Pty Ltd. The preference shares held by Danny are not included in the sale. Erica, the sole director of Consolidated Holdings Pty Ltd, is appointed as sole director of TFS. In the contract for the sale of shares (Sale Contract), Abdul, Benita, Charlie and VBH warrant that there have been no breaches of the Corporations Act in relation to the establishment or operation of TFS prior to settlement.

Erica considers that the terms of the contracts entered into with Property Holdings Ltd and Timber Supply Solutions Pty Ltd are not on favourable terms, and believes she could negotiate better deals on behalf of TFS. She wonders if there are any grounds on which the validity of these contracts could be challenged, with regard to corporations law.