Blo5540 Company Law - Director Assessment Answers

How to use the IRAC Method

Issues

Identify and state the legal issues involved in the question. For example, does it involve contract law (if so, what aspect?), a trade practices issue (e.g. misleading conduct), a company law issue (e.g. breach of director’s duty), negligence?

HINT! Read the “requirements” of the question that usually will appear at the end of the case study. Often it will tell you or steer you towards the issue of law.

Rules/Relevant Law

Explain the legal principles (rules) relevant to the issues identified. Any relevant legislation and precedent cases should be used to support the explanation. That is, “tell the story of the law” in a logical way.

Application/Analysis

Use the law to argue for each party’s position or, in other words, apply the law to the hypothetical facts of the case study. This involves explaining the relevance of the law to the scenario and how it can be used by each party to argue their case.

You need to consider the law from each party’s point of view. This will develop an argument and might raise different legal interpretations.

Conclusion

Arrive at a conclusion based on your preceding explanation, analysis and argument. Note that there is usually not one correct answer, although there may be one answer that is stronger than the others. So long as you have explored the law in relation to the facts and have put forward what you think the outcome/answer is, that is all that is expected of you.

Resources applied for this assessment (Australian Law)

Essential textbook

Lipton, Herzberg and Welsh, Understanding Company Law, 19^th Edition – Thomson Law Book Co, 2014 ISBN 9780455240213

Essential legislation

Australian Corporations & Securities legislation published by CCH only. 2018 edition, Vol 1 only ISBN 978192554847

1. Theory only

What is the difference between:

• a managing director and a chair?
• a nominee director and an alternate director?

2. You must use IRAC to answer this question. At least identify the areas of law. Note that below you are being asked about three issues (I have highlighted them for you!)

Kelvin-Decline Ltd manufactures and wholesales fashion clothes. The company has 3 directors, including Kelvin, the managing director. The company does not have a constitution. The directors are negotiating to sell the company's factory and to shift manufacturing to China. All the members attend an annual general meeting of the company and the directors advise the meeting about their plans for the future. The members disagree with the factory closure and a resolution is passed by 80% of the votes that the company is not to sell its manufacturing facility. The directors tell the members that they will ignore their resolution. The members then pass a resolution removing a director. They then vote to replace the managing director.

Required

Advise the sacked directors about the matters above. If you do not consider the members have acted correctly, provide alternative procedures they could have used.

3. Theory only

“Directors have a duty to put the interests of shareholders ahead of any other party”.  

Do you agree with this viewpoint?

4. You must use IRAC to answer this question. At least identify the area of law (there is only one here). Note that it is however in your very best interests that you are regularly practicing IRAC even if this occurs after class discussion. Practice is the key to success!!

The directors of Final Ltd have been monitoring for some time the declining sales and profitability of the company. They decide the company should change to a new product range which is predicted to be more profitable. These new products will require an increase in capital to set up a new factory and the directors make a large share issue to Mick Deadwood to obtain the necessary funds.

Lee Lion is a shareholder in Final Ltd. He is unhappy that his shareholding, which represented 26% of the issued shares, has now been diluted to 20% after the share issue to Mick Deadwood. He claims that the directors have issued the shares with the intention to dilute his shareholding so that he will not be able to block alterations to the company’s constitution. The directors reject Lee’s claim asserting that they only care about the company’s best interests. Lee is considering whether a court would find the share issue invalid.

Required

Describe the directors’ duty that is relevant to these facts. Include cases in your answer and discuss from the facts above those matters that the court would consider important in reaching its decision.

5. You must use IRAC to answer this question. At least identify the areas of law (there is one but some student may identify two…either way one leads to the other so one is ok).

Bananas Pty Ltd manufactures pyjamas and has a successful export business and worldwide recognition for the quality of its products. Benita One is the company’s non-executive Chairperson and Bob Two is the Managing Director. Ted Big is the Marketing Director of the company.

Benita has a material importing business and sells her products to Bananas Pty Ltd from which they manufacture their pyjamas.  Bob has queried whether this is appropriate but Benita assures him that she is entitled to retain any profit because the prices she charges are fair and competitive. Further, that as the company’s constitution makes no mention of this whole subject matter she is not prevented from conducting such transactions.

Ted Big arranges for his partner Jemima to register a company named TJ Pty Ltd and the company commences to manufacture and sell dressing gowns.  Business prospers.  

Bananas Pty Ltd expands its activities to cover the full range of sleepwear products but finds it difficult to succeed with its dressing gowns as its customers around the world have agreements with TJ Pty Ltd. A company search at ASIC reveals Jemima as the sole director and shareholder of TJ Pty Ltd.  Her home address in the ASIC records leads Bananas Ltd back to Ted and he is confronted with this discovery.  

Ted contends that he has done nothing wrong as Jemima is entitled to do what she wishes, that TJ Pty Ltd is separate from him, that there was no intention to cause detriment to Bananas Pty Ltd as it was not trading in dressing gowns at the time when TJ Pty Ltd commenced business.

Required:

(i) Explain whether you agree with Benita’s assessment that she is entitled to retain the profits she has made.

(ii) Advise Bananas Pty Ltd whether it would succeed in any action against Ted Big. 

6. You must use IRAC to answer this question. At least identify the areas of law (there are three). Note: part a) has two areas of law, part b) has one but it is also one of the two from part a). Part c) is an area of law from a previous topic!...this is a bit of revision but this is a typical exam style question so still do it please

Harry, Bert and Simon are the directors of Adventure Ltd, a company that organises holidays involving extreme sports. The members are Harry, Bert, Simon and Paul. The company is expanding and considering opening offices in Melbourne and Sydney. At a directors’ meeting, discussion as to staffing the offices takes place. It is decided to place an advertisement for two managers in the employment section of the West Australian Newspaper. Harry’s son Fred applies for the position in Melbourne and Bert’s nephew Trevor applies for the position in Sydney.

To fund the expansion, the directors of Adventure Ltd explore various alternatives. Adventure Ltd’s banker Bigbucks Bank is willing to lend funds to the company however the directors decide to issue a large parcel of shares to Eddie, who is a friend of the directors. As a result of the share issue, Paul’s shareholding reduces to 47%. Paul previously held 52% and had written to the directors expressing his dissatisfaction with their performance and his intention to remove and replace them at the next AGM.

Required

• Discuss the procedure the directors and the company must take in order to appoint Fred and Trevor to these positions. Use the Corporations Actin support of your answer.
• Would your answer to the above be any different if Adventure Ltd was Adventure Pty Ltd?
• Discuss the relevant duty the directors may have breached by issuing the shares to Eddie. Include in your answer the test that the court may use to determine a breach of this duty. Use the Corporations Actand case law in support of your answer.  

7. You must use IRAC to answer this question. At least identify the areas of law.

Your areas (2) of law should be easy to identify in the requirements!

Thick Ice Ltd operates an ice skating rink. The directors of Thick Ice Ltd are Henry (chairperson of the company, non-executive director and retired accountant); Jack (managing director) and Tanya (non-executive director and ice skating star).

Last year the directors decided to expand the company’s business by opening shops to sell winter sports equipment. The shops commenced trading just before a directors’ meeting at which Jack persuaded Henry and Tanya that they only needed to hold board meetings every 3 months, as the company’s business was consistently successful under his management and did not require any closer monitoring. Over the last 6 months there has been 2 directors meetings and at each of them Jack has been unable to present financial reports claiming that there were problems with the accounting software that had prevented the reports from being ready. On each occasion Jack had advised Henry and Tanya that everything was fine and he estimated the company was achieving budget.

Yesterday, Henry and Tanya were summoned to an urgent meeting by Jack. He informed them that the new shops had not been profitable; that the company had not been able to pay for the inventory it had purchased at the time of opening the shops; and, the company was now insolvent and would have to be wound up.

Jack admitted to Henry and Tanya that the reason there had been no financial reports was that he had reduced accounting staff to save money but that he had worked very hard to save the company and had done what he thought was best for it. Henry did not consider he had any responsibility for the failure of the company as he had relied on Jack. Tanya felt that as she was only appointed a director because she was a famous skater, the company’s business and financial position was not her responsibility.

Required:

For each director, discuss their performance under the duties of care and diligence AND to prevent insolvent trading (include any relevant defences/safe harbours available).

[Refer to cases and sections of the Corporations Act where appropriate]

8. Theory only

Mary shows her share certificate in Gamble Pty Ltd to Cyril.  The certificate displays a shareholding of 10,000 ordinary shares.  A transfer of shares form is signed and Cyril pays Mary $20,000 for the shares.  Cyril lodges the share transfer form and Mary’s share certificate with Gamble Pty Ltd.  The company secretary of Gamble Ltd writes to Cyril advising that the share certificate accidentally displayed an extra “0” and that only 1,000 shares were owned by Mary and these have been recorded in the share register under his name.  The company points out that the register displayed the correct shareholding of 1,000 shares and Cyril should have checked this out. Cyril cannot find Mary who has departed for Iraq.

Advise Cyril. 

9. Theory only

(a) Describe the legal significance of both a share certificate and an entry in a company’s share register.  Do share certificates have to be issued for all shareholdings?

(b) How does a transfer of shares differ from a transmission of shares. 

10. You must use IRAC to answer this question. At least identify the areas of law (there are two and the clues are in bold).

The members of Revolution Ltd are dissatisfied with rule 15 of the company’s constitution which gives the directors the power to borrow funds as they see fit.  The members wish to amend this clause so that the directors must obtain members approval before any borrowing can take place.

The directors refuse to hold a general meeting to consider the amendment.

REQUIRED:

(i) Are the directors entitled to refuse to hold the general meeting?

(ii) Describe the alternative methods provided in the Corporations Act for the members to place this matter before a members’ meeting for consideration.

11. You must use IRAC to answer this question. At least identify the areas of law (there is one but some student may identify two…either way one leads to the other so one is ok).

Hiphop Pty Ltd (a company without a constitution) distributes music CD’s. Its directors are Spike Hip and Chelsea Hop.  Its members are Spike, Chelsea and Fred Flop.

One day Fred hears some exciting new music and inquires into its source. He discovers that the music producer was Rage Records, an organisation that usually used Hiphop Pty Ltd to distribute its music. However, these CD’s had been distributed by a company called SC Pty Ltd. Fred searches company records at ASIC and finds SC Pty Ltd has Spike Hip and Chelsea Hop as its directors.

Fred writes to Hiphop challenging the directors over their conflict of interest, claiming that they should give the company the profits SC Pty Ltd has made from their diversion of Hiphop’s business. Spike and Chelsea call a general meeting of Hiphop Pty Ltd and at the general meeting have the votes to successfully pass a resolution approving their actions, authorising them to continue to divert Hiphop’s business as they see fit and to retain any profits therefrom.

Advise Fred on the validity of the resolution passed at the general meeting and whether there is anything a minority shareholder can do.

Answer 

1. Difference between managing director and chairperson

Managing Director of the organization controls all the affairs of day to day occurring within the company. However, the managing director cannot be selected for more than 5 years. On the other hand, the chairman is considered as a person who is the head of the Board of Directors. The managing director has to provide details to the Board of Directors of the organization (Heibutzki, 2018). The chair person is considered as an independent director and the Non Executive Director, on the other hand, the Executive as well as Non Independent Director(Ajgaonkar, 2015). The Chair person can be the managing director and then designated as Chairman and Managing Director (CMD).

Difference between a nominee director and alternate director

The nominee director is familiar under a responsibility whether formal or informal in order to act in accordance with the directions or instructions of others. The nominee directors as well as the particulars of nominator should be evidenced in the register of nominee directors of the company. On the other hand, an alternate director is considered as a director who is appointed to attend the meetings of board members on behalf of other directors of company in case, when the other director is not capable to be present at the meeting of the board members. The alternate director cannot itself be considered as a nominee director (Accounting and Corporate Regulatory Authority, 2018).

2. Issues: Whether the company can sell its manufacturing facility? Can the members pass a resolution to remove the director? Can they vote to replace the managing director?

Rule: According to ASIC, directors are required to act for the profit of the company and must act in interests of all the members in a collective manner. As per the rule, the directors cannot ignore the decisions taken by the members in meeting as they are held responsible for taking decisions related to the organization by passing resolutions. The members can pass a resolution for the removal of director under section 203 D of Corporations Act 2001.

Application: As there are 3 directors of the company, and the resolution was passed by 80% votes by the members, so the company cannot sell its manufacturing resource. The directors cannot ignore the decisions of the members as well as the resolution taken by them (ASIC, 2018).The members of the company can pass a resolution for the removal of director and vote to replace the managing director as well.

Conclusion: The directors cannot sell the manufacturing resource without the permission of the members. The board members possess the right to pass a resolution to remove the director and they can replace the managing director as well by voting.

3. It is the duty of the directors to put the interests of the shareholders ahead of any other party. Director should not get involved in such a situation where there is disagreement between their individual interest and company interest (Legal Vision, 2015). The best way is to reduce the potential for breach or liability as a director when the interests of the company, shareholders and creditors are prioritized over the third parties.As directors have various duties and obligations,they should consider the interests of the company, creditors as well as shareholders on top priority with the company. So, I agree with this point of view that directors owe duty towards shareholders ahead of other parties.

4. Issue: Whether the court would find the share issue invalid?

Rule: According to ASIC, the major duties of directors are to act in a manner so as to provide profit the company; exercise powers for which they are given authority; to act in a responsible and diligent manner; to avoid conflict of interests; and not to make improper use of their position for their benefits (Baker McKenzie, 2017).

Application: It is the duty of the directors to act for the advantage of the company but at the same time they owe duty towards shareholders as well. The directors should take the consent of the shareholder when he holds 26% of the issued shares that has now been diluted to 20%. As the directors have issued the shares to rise the funding for new factory, so they had no intention to dilute his shareholdings.

Conclusion: The directors are performing their duties and court cannot consider issued shares as invalid because the directors have acted for the best interests of the company. The directors will be able to provide evidences that they have issued the shares to increase funds for opening factory because of declining sales and productivity of the company.

5. Issue: Is Benita entitled to retain the profits made by her? Can Bananas Pty Ltd take legal action against Ted Big?

Rule: It is the duty of the director to keep away from conflict of interests such as giving financial benefits to others in any manner not even indirectly, informally or involving in discussions about financial advantage. The directors must not provide, buy, lease or supply or issue any asset to a related party in any time in future. They must act for the advantage of the company and must prioritize the company, its shareholders and the creditors before third parties (Federal Register of Legislation, 2018). The directors must exercise their powers and discharge duties with reasonable care and diligence and similarly, any special responsibilities taken by chair person might also affect the scope of their duty of care and diligence.

Application: Benita is the non-executive Chairperson and is involved in selling products to Bananas for manufacturing of pyjamas. As per the ASIC, the Chairperson or directors of the company must avoid conflicts of interests so, she should not be entitled to get benefitted by doing business with the company in which she is chairperson.

Ted is the marketing director of the company and he should not provide any kind of benefits to other competitors and should act for the benefit of the company. He is not linked with TJ Pty Ltd. as Jemima is the sole director as well as shareholder of the company and is involved in manufacturing and selling dressing gowns. The product is entirely different from what Bananas were selling previously. However, the customers of Bananas have taken over by TJ through signed agreement. So, Bananas can succeed in taking legal action against Ted on this basis.

Conclusion: Benita is not entitled to retain profits made by her. Bananas can succeed in taking legal action against Ted.

6. Issue: Can directors or the company appoint Fred and Trevor to the positions of managers? Can directors issue the shares to Eddie?

Rule: Section 191 of the Corporations Act 2001 requires the director to disclose about material personal interests to other directors(AustLII, 2018). The director should provide details about the nature and extent of interest and association of interest with the affairs of the company. Along with it, ASIC requires the directors to act for the welfare of the company even if it could not benefit themselves (AustLII, 2006).

The Ltd refers to public company and Pty Ltd refers to proprietary limited company so, in proprietary limited company, the constitution provides for the duties and liabilities of directors according to Corporations Act 2001.

Application:As Fred and Trevor are relatives of directors of the company, the directors can appoint them as managers only after informing the details to the other directors of the company. However, they should be considered as one of the applicants for job and should not be given undue advantage because of being related to directors and if they prove to be capable to hold the position of manager, they should be appointed.

If Adventure Ltd was Adventure Pty Ltd, the constitutionof the company would provide for the duties and liabilities of directorsand they would have acted accordingly.

The directors should issue the shares with related party with the mutual consent of the shareholder Eddie as he was holding 52% of shares in the company which reduced to 47%. In order to determine if the breach have been conducted by the directors or not, the court will consider the test of best interests for the company. If the court will find that the act of directors is for benefit of the company and not for third party, it will not be considered as breach.

7. Issue: Whether the directors performed with care and diligence and to prevent insolvent trading?

Rule: Under section 180 of the Corporations Act 2001, the director should perform their duties with care and diligence and their actions should not make the company insolvent (ASIC, 2018).

Application: Henry, Jack and Tanya were the directors of the company. When Jack took the responsibility and not presented any financial report of the trading in six months, Henry and Tanya did not act with duty of care and diligence and not taken hold of the situation. On the other hand due to the act of Jack, the company involved in insolvent trading. So, all three of them are responsible for the financial loss of company.

Conclusion: All three directors did not act in care and diligence towards company and their acts put the company in insolvent trading.

8. As the shareholding of 1000 shares have been evident in the share register under the name of Mary, Cyril should have inspected it before purchasing shares from her. Cyril should have to incur financial loss as she believed Mary unknowingly.

The company is required to issue a share certificate in2 months of issuing or transferringtheshares and might issue only one share certificate for all the issued or transferred shares at a given point of time but if shareholder demands separate certificates, then company should issue separate share certificates.

10. Issue: Are the directors allowed to repudiate to hold general meeting?

Rule:  It is the duty of the directors as well as essential for them to hold general meetings. The directors of a public company cannot refuse to hold general meeting under section 248 of the CAct 2001. In case of refusal by director, members can call general meeting under section 249 F of the Act.

Application: The members can request for general meeting to directors but when the directors refused to call for general meeting, they have conducted breach of their duty. However, the members can call for meeting to amend the clause.

Conclusion: The directors are not allowed to repudiate to hold the general meeting. Even if they refuse, members can call general meeting to make the resolution.

11. Issue: Is the resolution valid that passed at the general meeting?

Rule: The directors are required to inform about their personal interests to the other directors. They should avoid conflict of interests and should act for the benefits of the company (AustLII, 2018).

Application: Being the directors of the company, they have become the directors of competing company which itself is conflict of interests and is disadvantageous for the company. Any kind of resolution passed against the welfare of the company is invalid.

Conclusion: The resolution is invalid as it is against the welfare of the company.

References

Accounting and Corporate Regulatory Authority. (2018). Is an alternate director considered a nominee director? Retrieved from acra.gov.sg:https://va.ecitizen.gov.sg/CFP/CustomerPages/ACRA_google/displayresult.aspx?MesId=15057972&Source=Google&url=va.ecitizen.gov.sg

Ajgaonkar, P. (2015). What is the difference between a CEO, CMD, MD and COO and what are their functions? Retrieved from Linkedin.com: https://www.linkedin.com/pulse/what-difference-between-ceo-cmd-md-coo-functions-pranav-ajgaonkar

ASIC. (2018). ASIC guide for small business directors. Retrieved from asic.gov.au: https://asic.gov.au/for-business/your-business/tools-and-resources-for-business-names-and-companies/asic-guide-for-small-business-directors/

ASIC. (2018). Directors' key responsibilities. Retrieved from Asic.gov.au: https://asic.gov.au/for-business/your-business/tools-and-resources-for-business-names-and-companies/asic-guide-for-small-business-directors/directors-key-responsibilities/

AustLII. (2006). Corporate power, related party and shareholder ratification issues in financial transactions. Retrieved from Austlii.edu.au: https://classic.austlii.edu.au/au/journals/QldJSchol/2006/64.pdf

AustLII. (2018). Corporations Act 2001. Retrieved from Austlii.edu.au: https://www5.austlii.edu.au/au/legis/cth/consol_act/ca2001172/

AustLII. (2018). Corporations Act 2001 - SECT 191. Retrieved from Austlii.edu.au: https://www5.austlii.edu.au/au/legis/cth/consol_act/ca2001172/s191.html

Baker McKenzie. (2017). Duties and liabilities of directors of Australian companies. Retrieved from Bakermckenzie.com: https://www.bakermckenzie.com/en/insight/publications/2017/12/duties-and-liabilities-of-directors

Federal Register of Legislation. (2018). Corporations Act 2001. Retrieved from legislation.gov.au: https://www.legislation.gov.au/Details/C2017C00328

Heibutzki, R. (2018). The Difference Between CEO, President & Managing Director. Retrieved from chron.com: https://smallbusiness.chron.com/difference-between-ceo-president-managing-director-37047.html

Investopedia. (2018). Share Certificate. Retrieved from Investopedia.com: https://www.investopedia.com/terms/s/share-certificate.asp

Legal Vision. (2015). What are director’s duties and how can a director comply with them? Retrieved from Legalvision.com.au: https://legalvision.com.au/directors-duties-can-director-comply/

Lindt & Sprungli. (2018). Registered share and shareholder registry regulations. Retrieved from Lindt-spruengli.com: https://www.lindt-spruengli.com/fileadmin/user_upload/corporate/user_upload/Investors/BOR/Sharehoder_Registry_Regulations_and_applications_EN.pdf

The KCP Limited. (2017). Procedure for Transfer & Transmission of Securities. Retrieved from Kcp.co.in: https://www.kcp.co.in/downloads/investor/shareholders-information/procedure-for-transfer-transmission-of-securities.pdf