Week 3: Contracts with third parties

Julian has recognised that for the business to grow, he cannot do everything by himself. He has asked his warehouse manager, Andy, and his office manager, Tom, both of whom have been with Retrofit for five years, to carry out those activities generally involved in running the business.

Andy deals with the suppliers and freight companies to ship the goods out. Anything related to the warehouse is his domain.

Tom deals with staffissues, office procedures and administration issues. Tom has given Michelle, a parttime office hand, authority to order stationery from Officeworks, where the company has a credit account.

In addition, Julian asks Bev to keep an eye on the finances of the company. He asks you to prepare the paperwork to appoint Bev as a director of the company, effective in three months' time. In the warehouse where the goods are recycled, Julian is concerned if a customer or staff member slips on the oil or grease that the warehouse trucks sometimes drip on the warehouse driveway, would Julian or the company be liable? Julian explains that he read in the newspaper recently that a factory owner was fined and liable for imprisonment for having an unsafe work environment a staff member died on the company premises. Bev has told Julian that the company needs additional funds if it is to grow and achieve Julian's goals. Bev suggests setting up an overdraft facility with the bank. Julian asks her to go to the bank on behalf of the company to get additional funding of no more than $90,000. Julian knows about recycling but very little about finance.

Bev goes to Westpac's Dandenong branch and sees the business banking manager, Jonathan, on 31 March. Julian has banked with Westpac for the past 25 years. Bev tells Jonathan that Julian has asked her to organise additional finance for his company. Julian is the managing director and knows the basics of finance but is too busy to deal with the bank. He has always regarded Bev as the finance expert even though she has not yet been appointed as a director. Jonathan has dealt with Bev before and assumes she has the authority to negotiate funding for the company, especially when Bev says she has been asked by her son to arrange finance. Bev therefore agrees on a term loan of $160,000 and an overdraft of $15,000 up to a maximum of $45,000.

The bank requires security for the funds. Bev offers the company plant, equipment valued at $13,200 plus goodwill as security. Bev and Julian are also required to provide a personal guarantee to the bank for the overdraft before the loan can be approved.

The constitution that you drafted for the company states that any loans over $100,000 must be approved by the board of directors and the shareholders. There has been no formal meeting of the board of directors approving the loan.

Julian comes to see you at the quarterly review of the company accounts. The business is going well and according to Bev the draft financial accounts she has prepared show a profit of $385,000. Julian can only see $238,000 in the bank account.

ISSUES TO BE DISCUSSED IN GROUPS IN WORKSHOP

1. Julian is aware the company has potential risk of harm to the public and personal injury to the staff. You have explained to him that the company is a separate legal entity and therefore he is protected. He understands this and is also aware of the legal exceptions to this rule. He recently read the following newspaper article in the age and wants you to explain to him how the company was found to be liable for manslaughter, when you said that the company is just a piece of paper.

https://www.abc.net.au/news/2024-02-19/leith-hanna-michael-tsahrelias-forklift-manslaughter-sentence/103483282?utm_source=abc_news_app&utm_medium=content_shared&utm_campaign=abc_news_app&utm_content=mail

REQUIRED: Please review the article and explain to Julina how the company could be liable for manslaughter and also what are the personal consequences for him?

2. In Retrofit Pty Ltd the staff are:

a. Julian,

b. Bev (consultant)

c. Tom

d. Andy

e. Michelle

The purpose of having these people is to have them look after different aspects of the business so Julian can look at the big picture.

REQUIRED:

Explain to Julian how Retrofit Pty Ltd can enter into contracts now that it is a company.

3. What is the staff's responsibility to the company when dealing with suppliers and creditors of the company.

REQUIRED:

How do we know whether they can or can not enter in various agreements with customers and suppliers?

4. Bev was asked by Julian to go to the Bank and obtain finance for the company. She did so but in her opinion believed that the company needed more than Julian thought for the company. Julian is not happy with this and wants to know if the company or he or her Mum is liable for the loan or neither.

REQUIRED:

a. Who is liable and why?

b. Does Bev have the right to do what she did and or not.

5. In the constitution your drafted for the company there was a clause that any loans over $100,00 needed the approval of the Board of directors and the shareholders, which is effectively Julian. Bev did not do so.

REQUIRED:

a. Assume that the Bank has provided the funds that Bev asked for the company. Julian is not happy, so what will happen if the company refuses to pay back the loan?

b. Should Jonathan have been aware of the internal rules of the company?

6. Michelle is the part time office worker has gone to Office Works and acquired office supplies for the company

REQUIRED:

a. Does Michelle have the authority to do so and if so what type of authority does she have?

7. Companies like Retrofit Pty Ltd enter into agreements on a regular basis through the actions of staff. Andy deals with supplies for the company. Due to rising costs the company is always looking for cheaper alternatives. Ship Cheap Pty Ltd can provide transport and logistics services to the company at a cheaper rate than the current transport companies.

The directors of Ship Cheap Pty Ltd send a contract via email to Andy. The company wants the company to sign the contract and secondly it has an electronic Docu Sign box on the form.

REQUIRED:

a. Explain to Andy how the company signs the contract. Julina is the only director at the moment.

b. Does Julian have to print off the contract and physically sign it?

c. What if Andy signs it?

8. Julian is very entrepreneurial and wants to acquire a food related business and also buy a warehouse. You have explained to him the issue of not mixing different at risk business into the one separate legal entity. You suggest that when the separate activities and assets are acquired we need to restructure the company.

Your initial thoughts are 3 separate companies to run separately the food, the waste recycling and ownership of the warehouse. To minimise costs you suggest that all three companies be owned by Julian and not set up a holding company.

Assume that the food company needs additional funds and that the bank wants additional security form the company. If the property company gave the property as security for the loan to the Bank and the food company got the loan but due to economic circumstances it could not repay it. What will happen?

REQUIRED:

a. Explain To Julian if the Bank can take and sell the property

b. Should the share of all three be owned by Julian? What was one of his key concerns when he came to see you on Monday 4 March 2024?

9. Julian has come to see you to review the quarterly financial accounts. According to the financial accounts prepared by Bev, it shows a profit of $385,000. However when you looked at the bank statement it showed $238,000 in the bank accounts.

REQUIRED:

a. Explain to Julian how this arises and is the profit overstated, because he thinks the company is liable to pay tax on money it does not have.