TUTORIAL QUESTIONS
(1) A Pty. Ltd. has an issued capital of 100 $1.00 shares paid to 50 cents. B and C each
hold 50 shares and are the directors of A Pty. Ltd. B borrows $50,000 from his bank on
behalf of the company. Some time later, the business activities of A Pty. Ltd. fail and it
becomes apparent that the company cannot repay the loan to the bank. B is known to
own substantial assets and the bank wishes to recover the amounts outstanding on the
loan from B.
a. Advise B as to his liability.
b. What steps could the bank have taken in order to recover the full amount from
B?
(2) X deposited $10,000 with Finance Deposits Pty. Ltd., a company controlled by Smith
Jones, stockbrokers. Smith Jones has gone into liquidation owing large amounts to its
bank, clients and depositors of money to its cash management arm. It appears that
these creditors apart from the bank, will be unlikely to recover their money.
Under Part 7.10 of the Corporations Law, investors may claim compensation for losses
suffered as a result of the insolvency of a broker member of the Australian Stock
Exchange, from the National Guarantee Fund. Finance Deposits Pty. Ltd. is not such a
member.
X believed that he deposited his money with Smith Jones.
Can X claim compensation from the National Guarantee Fund?
(3) Bingo Ltd. is a manufacturer of electrical goods. It entered into a contract with Melvin
Ltd. a large discount retailer. Under this contract, Bingo Ltd. was to supply its goods
exclusively to Melvin Ltd. The directors of Melvin Ltd. subsequently discover that a
wholly-owned subsidiary of Bingo Ltd. is selling identical electrical goods to competitors
at cheaper prices. It appears that the subsidiary was incorporated to enable Bingo Ltd.
to avoid the effects of the contract with Melvin Ltd. Advise the directors.
(4) Ace Pty. Ltd., is a company engaged in the business of retailing domestic electronic
equipment. Its directors are Ruff and Reddy who also are the directors of Bland Pty.
Ltd., a company which carries on the business of selling commercial electronic
equipment mainly to offices.
Both Ace Pty. Ltd., and Bland Pty. Ltd., have experienced difficulties in paying their
debts. A secured creditor of Ace Pty. Ltd., demanded payment or threatened the
company with bringing about its winding up. Ruff and Reddy transferred some funds
from Bland Pty. Ltd., to Ace Pty. Ltd., in order to enable the secured creditor to be paid
and to allow Ace Pty. Ltd., to trade out of trouble. Rodgers is a creditor of Bland Pty.
Ltd., which soon after goes into liquidation.
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Can Rodgers recover his debt from
(a) Ace Pty. Ltd.?
(b) Ruff and Reddy?
(5) Z was an employee of Ace Ltd., a company which manufactured electronic equipment.
The contract of employment entered into by Z and Ace Ltd. contained a restraint of
trade clause which prevented Z from engaging in a business in competition with Ace
Ltd. for a period of three years after leaving his employment. Ace Ltd. inserted this
clause in the contract because it used certain secret, technical processes in its
manufacturing business.
Z left the employ of Ace Ltd. and soon after organised the incorporation of Modern
Electronics Pty. Ltd. for the purpose of conducting the manufacture of electronic
components. The shareholders of the company were Z's wife and several associates of
Z who were under Z's control.
Ace Ltd. wishes to know whether it can enforce the restraint of trade clause against
Modern Electronics Pty. Ltd.
Discuss.
(6) A Ltd. holds 45% of the voting shares of B Pty. Ltd. In addition, A Ltd. holds all the
preference shares issued by B Pty. Ltd. so that overall, A Ltd. holds 53% of the issued
share capital of B Pty. Ltd.
The preference shares carry a right to a 12% dividend, but no further rights. A
nominee of A Ltd. holds a further 7% of the voting shares in B Pty Ltd.
Under the Corporations Law:
a. Can B Pty. Ltd. hold any shares in A Ltd? Explain.
b. Are A Ltd. and B Pty Ltd. related companies?
c. In what circumstances is it necessary to determine the existence of a holding
company subsidiary relationship?
(7) X and Y have been carrying on a successful business in partnership for some years.
They now seek your advice as to the possible advantages and disadvantages of forming
a company to take over the business. What factors should they consider? What type of
company would best be suited to their needs?
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Having decided to form a company, X and Y ask your advice on the following matters:
i. What documents will or may have to be prepared in connection with the
incorporation of the company?
ii. What other steps must be taken?
iii. What is the effect and significance of the certificate of incorporation?
Refer to relevant sections and Forms as contained in the Australian Corporation and
Securities Legislation and the Regulations therein wherever applicable.
(8) Ozy Sail Pty. Ltd. is a company incorporated in 1985. It was set up to produce film and
videos of Australian achievements in competitive sailing, for sale to television networks
and to create a national sailing museum.
The Constitution of the company listed the following objects:-
a. to produce films about Australian participation in international sailing
competitions;
b. to construct a permanent exhibition of Australian sailing achievements in
Fremantle;
c. to promote interest in the sport of sailing; and
d. to do all things which the directors consider necessary or incidental to the
furtherance of the above objects.
The Directors were Kelso and Bryant who both attended a competition in New York in
order to make a film for sale to a television network in Australia. The Australian team
at the competition was disqualified early in the event so Kelso decided to make a film
called "New York Marathon" instead.
On his return to Australian, Kelso entered into a contract with Channel 6 in Melbourne
whereby the television station agreed to purchase the film for screening. Two weeks
later, the station changed its mind and argued that the contract was invalid because it
was outside the objects of Ozy Sail Pty. Ltd.
Kelso then arranged for the sale of "New York Marathon" to a cable network in New
York. Kelso proposes to make further films dealing with athletics for sale in America.
Black holds 15% of the issued shares of Ozy Sail Pty. Ltd. He invested in the company
because he is a sailing enthusiast weighing to promote the sport in Australia. He is
unhappy about Ozy Sail Pty. Ltd. deviating from its original purpose and producing films
on other sports and selling them overseas.
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Advise Kelso on the following:
a. the validity of the contract with Channel 6;
b. any rights Black may have in objecting to the activities of Ozy Sail Pty. Ltd.;
c. any steps that Kelso may take to ensure that the proposed activities may
proceed.
d. Would your answers to the above be different if the objects of Ozy Sail Pty. Ltd.
included the following:
"to carry on any other business which the board of directors may consider as
being advantageous to the company"
(9) Brick Pty. Ltd. has the following provisions contained in its Constitution :
1. Where a new issue of shares is made, they shall first be offered to existing
members in proportion to the shares they presently hold. In the event of any
member not accepting some or all of the shares to which he is entitled, those
shares shall be offered to the remaining members in proportion to the shares
they presently hold.
2. The sales manager of the company shall be A. Harris for a period of ten years
at a salary of $75,000 to be increased by 10% per annum in each successive
year for the term of his employment.
3. The directors may compel the transfer at valuation of the shares held by any
member who is engaged or interested in a business in competition with the
company. In such a case the shares will be transferred to such existing
member or members as the directors nominate.'
a. The directors purport to issue shares to an associate of theirs who is
not presently a member of the company. X, a member of the company,
claims that the shares must first be offered to existing members in
accordance with article 1. Can he enforce this claim?
b. Harris is dismissed from his position after two years. Can he sue the
company for breach of contract? Would it make any difference if Harris
was a member of the company?
c. Brown holds 30% of the issued shares in a company engaged in the
same business as Brick Pty. Ltd. On discovering this, the directors
exercise their power conferred by provisions. Provisions has recently
been included so as to compel the transfer of Brown's shares to a
particular member at a price determined by an independent valuation.
What if the valuation was at the discretion of the directors?
(10) The Australian Broadcasting Tribunal ruled that Mr Bond was not a fit and proper
person to hold a television broadcasting licence.
Mr. Bond appealed against this decision and claimed that he was not the holder of a
licence. A company of which he was a controlling shareholder held the licence.
Is this argument valid?
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(11) Mildred was the owner of a nursing home for the aged. In 1986 she formed a
company, Pleasant Valley Pty. Ltd., for the purpose of purchasing the nursing home.
She and four other family members each took up one share and Mildred was appointed
the governing director of the company. In consideration of the purchase, the company
was loaned $400,000 by Mildred payable on demand.
Some months later, health inspectors visited the premises and discovered that various
health standards were breached.
Section 10 of the Aged Homes Act 1958 provides as follows:
A person who fails to observe prescribed health standards in the operation of a
registered nursing home shall be guilty of an offence - Penalty $5,000."
The maintenance of health standards was the responsibility of Ruth who is a
shareholder of Pleasant Valley Pty. Ltd. Mildred had directed Ruth to follow certain
procedures which would have compiled with the legislation.
Pleasant Valley Pty. Ltd. are being prosecuted for breach of the Aged Home Act. Advise
Mildred.
Would your answer by different if Ruth was a director of Pleasant Valley Pty. Ltd.?
(12) The Constitution of A Pty. Ltd. provide that the directors are empowered to borrow up
to $50,000. The directors purport to borrow on behalf of the company $70,000 from X.
The directors then change their minds. Can X enforce the contract?
(13) The Constitution of a company provided that any purchase of land by the directors
required the approval of the general meeting. The directors entered into a contract for
the purchase of land after showing the vendor a copy of the resolution of the general
meeting approving the purchase.
It turned out that there had not been a quorum present at the general meeting and the
company wishes to avoid the contract. Advise.
(14) A, B and C are the directors and equal shareholders of Hartford Pty. Ltd. a company
engaged in manufacturing. At a meeting with X, an outside supplier, A and B said that
A was managing director of Hartford Pty. Ltd. The Constitution of the company
provided for the appointment of a managing director but in fact one had not been
validly appointed.
A entered into a contract with X on behalf of Hartford Pty. Ltd. for the supply of
materials to the value of $20,000.
Hartford Pty. Ltd. refuses to pay this amount on the basis that A was not its managing
director and had no authority to enter into the contract on behalf of the company.
Advise X.
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(15) Daytone Pty. Ltd. is a company engaged in the manufacture of timber products. The
directors of the company are A, B, C and D who are listed as directors of the company
in its return lodged . E, who was formerly a director of the company is still engaged in
management of the company but had ceased to be a director since being convicted of
an offence involving fraud in the operation of another company. At all material times, A
had been resident overseas and B has been very ill and neither had taken any part in
the management of the company. C had acted as managing director of the company
with the consent of the other directors, but at no time had he been actually appointed
as managing director by the board. The company entered into a contract with Precision
Engineering Pty. Ltd. to purchase new machinery for $300,000. The contract was
signed by E "on behalf of Daytone Pty. Ltd.", after C had told a director of Precision
Engineering Pty. Ltd. that he was managing director of Daytone and E was in charge of
production matters.
The machinery was delivered but Daytone refused to proceed with the contract because
they found a similar machine available at a lower price.
Advise the directors of Precision Engineering Pty Ltd. whether they can enforce
payment under the contract.
(16) Albert Ltd. is a subsidiary of Bravo Ltd which is a listed company controlled by Morris, a
well-known entrepreneur. The active directors of Albert Ltd were Morris and his
business associate Harris. It was widely known in the business community and press
that Morris effectively controlled and dominated all companies in the group.
Bravo Ltd. borrowed $100 million from Universal Bank. This loan was secured by a
guarantee executed by Albert Ltd. and all other subsidiaries in the Morris group of
companies.
The common seal of Albert Ltd. was affixed to the guarantee and attested by Morris as
director and Harris as company secretary even though Harris had not been appointed as
secretary. The other directors of Albert Ltd was not told of this transaction and had no
knowledge of it.
The solicitor acting for Universal Bank noted that Harris had not been appointed as
secretary according to documents lodged with the ASIC. Green was a finance manager
for companies in the Morris group but not a director of any of the companies. He told
the bank solicitor that the form stating that Harris had been appointed as Secretary was
about to be lodged and everything was in order. Morris and Harris were present when
this was said. The transaction proceeded but no documents were lodged with the ASIC.
All companies in the Morris group fell into financial difficulties and soon after the
Universal Bank sought to enforce the guarantee against Albert Ltd.
(1) Is Albert Ltd bound by the guarantee?
(2) Would your answer be different if the solicitor for Universal Bank knew that
Harris had not been appointed as the company secretary but proceeded with
the transactions despite this?
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(17) Athol, Hartog and Brand are the partners of Ace Food Co., a supplier of imported
grocery lines to retailers. They decide to incorporate a company, Ace Foods Pty. Ltd.,
with each holding an equal number of shares and each being a director.
Prior to incorporation, Athol and Hartog entered into a contract with Gourmet Tucker
Pty. Ltd. for the supply of caviar and champagne to the value of $3,000. The contract
is signed by Athol and Hartog, as directors, on behalf of Ace Foods Pty Ltd., which at
the time of the contract, unknown to Athol and Hartog, was not yet incorporated.
Athol, Hartog and Brand, between themselves and their families, consume the caviar
and champagne.
Soon after incorporation of Ace Foods Pty. Ltd., a letter is received from Gourmet
Tucket Pty. Ltd. demanding payment of $3,000. Athol writes back saying they will pay
soon, but at the moment they are short of funds. Two months later, Ace Foods Ltd. is
threatened with legal action.
Advise as to the liability of:
(a) Athol, Hartog and Brand, and
(b) Ace Foods Pty. Ltd.
(18). Albert was appointed a director of Oscar Pty. Ltd. by resolution of the general meeting
for a period of twelve months. At the expiration of this term, Albert was not reappointed
but has continued to act as a director and has participated in the management
of the company.
Is Albert an officer of Oscar Pty. Ltd.?
(19) Can the following persons be directors of a company incorporated in Australia?
(a) a resident of Singapore
(b) a person under 18 years of age
(c) another company
(d) the company secretary
(e) an undischarged bankrupt
(f) a person convicted four years previously for offences involving stolen credit
cards.
(g) a person who was previously a director of two insolvent companies which had
been wound up.
(h) the company's auditor.
Cite the relevant sections in support of your answer.
(20) The majority of directors of Welco Ltd. wish to remove one of their number from the
board. He was appointed to represent the interests of the preference shareholders.
Advise the directors whether they can do this, and if so, what steps must be taken.
Would your answer be different if Welco Ltd. was a proprietary company?
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