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BUS328 KAPLAN TSA 2014TUTORIAL QUESTIONS INTRODUCTION

Do not answer these questions on this question paper. It is vital that you practice writing out answers by hand in preparation for the final exam. Your tutor will be checking your work so please ensure that your hand written answers are written in essay style (no dot points) or IRAC method (where appropriate) on separate A4 lined paper. Please attempt to use your own words when answering so that your tutor can gauge your understanding of the law.

It is only possible to cover a limited number of questions in each tutorial. The questions are intended to reflect major principles where possible, but in some weeks it has been necessary, due to limited space, to omit questions on important issues. References to CA are to the Corporations Act 2001 as amended to January 2013.TUTORIAL ONEQUESTION ONEExplain in your own words the following:In Australia, the Corporations Act is Commonwealth legislation and yet the Commonwealth Government does not have the constitutional power to enact this law. QUESTION TWOWhat do the acronyms ASIC and the ASX mean and what roles do they play in company law?QUESTION THREERelda Insurance Ltd has received an application from Yendor Pty Ltd to take out an insurance policy covering the motor vehicles driven by the employees of Yendor Pty Ltd.

Using the CA and cases, explain whether a company has the legal capacity to:

(i) own assets (such as motor vehicles);

(ii) enter into a contract (such as an insurance policy);

(iii) employ people.

QUESTION FOURPremium Plumbing Pty Ltd (Premium) required further capital for expansion and borrowed $200,000 from Eastpac Bank Ltd (Eastpac). After a time, an unforeseeable misfortune occurred causing Premium to suffer a large loss. It immediately advised Eastpac and stopped trading. Premium is unable to meet the repayments due on its bank loan and has few assets. Eastpac is considering ways to recover its money.

Would Eastpac Bank Ltd be successful in enforcing its claim against?(i) the directors,

(ii) the shareholders, or

(iii) the employees

of Premium Plumbing Pty Ltd?

[Quote sections and cases to support your opinion]

QUESTION FIVEFor many years Ali has been the chief chemist with the Pop-a-Pill Drug Company Ltd. His employment contract in clause 33 requires that in the event of Ali leaving his employment, he will not work in competition with the Pop-a-Pill Drug Company Ltd for 1 year. Ali registered an Australian company [Gee Chemicals Pty Ltd] and when he resigned from Pop-a-Pill he immediately became the managing director of Gee Chemicals.

Pop-a-Pill claims Ali is in breach of contract. Ali says that Gee Chemicals is in competition with Pop-a-Pill Drug, but he personally is not. Later, Gee Chemicals Pty Ltd is found to be selling drugs in breach of the law. Ali claims that he is only an employee and that it is the company that has broken the law, not he.

Discuss

[A detailed discussion of contract law or criminal law is not required here]

TUTORIAL TWOQUESTION ONEDigger has a new mining venture and he plans to register a company. There are already 40 investors prepared to invest $10,000 each. To commence exploration $500,000 will be needed and Digger will contribute $300,000 with the remaining $200,000 made up of $5,000 from each of the other 40 investors. The company must obtain a further $500,000 after one year to complete the geological surveys and register the mining claim with the Government. At that time Digger will put in a further $300,000 and the company will need the remaining $200,000 from the other investors.Digger wants to have sole management control of the company and keep the companys affairs private and confidential. He also knows that after the claims have been lodged next year, the growth of the company will require the number of members to at least double.

Diggers accountant has advised him that the company most suited for his needs is a no liability company. Do you agree with this advice? Are there other company alternatives that could meet Diggers requirements?QUESTION TWOMonty and Mary are the only directors and shareholders of Contrary Pty Ltd. Mary holds 60% of the shares and Monty has 40%. Mary decides she would like to convert the company to On-side Ltd.

Advice Mary over the following matters:

(i) She hopes that the new company wont have to pay the debts of Contrary Pty Ltd.(ii) She requires your guidance on the steps necessary to effect the conversion she wants. (iii) She wants to know at least five differences in the principal characteristics of the two types of companies.

QUESTION THREEa) Can a proprietary company be registered as large or small? Explain.b) What are the advantages of small proprietary companies?QUESTION FOURBen has decided he will register a company to grow grapes and produce wine. He instructs his solicitor to draft a constitution for the proposed company. Whilst waiting for the solicitor to complete the work and before the company is registered, Ben meets a landowner who is prepared to lease suitable land to the proposed company. Ben has to act quickly to secure the land and so he signs a 20 year lease on behalf of the proposed company.

The company is later registered and at the first directors meeting the ratification of Bens lease is considered. Another director offers different land which is of a superior quality for growing grapes.

REQUIRED:

(a) How does corporate law classify the role undertaken by Ben role leading up to the registration of the company? What are the duties that such a person owes and to whom are they owed? Is the solicitor classified the same as Ben?

(b) What is the effect on Ben and on the company if the directors decide not to ratify Bens lease.

TUTORIAL THREEQUESTION ONE

Wizard Pty Ltd does not have a constitution.

Mr Henry Potter owns 1000 shares in the company and attends a meeting of members. The chairperson of the meeting is Wendy Wizard. Henry challenges Wendys right to be the chairperson of the members meeting and claims that the members should be able to appoint anyone they chose. Wendy rejects Harrys claim.

Henry claims that the members will remove the directors but Wendy asserts that the members do not have such a power.

Determine who is correct on each of these matters.

[Clue: Commence by Examining s141 to ascertain the appropriate rule]

QUESTION TWO

Shareholders of Stones Ltd have been selling parts of their shareholdings, thus increasing the total number of members. The company has no constitution. The managing director, Mick is unhappy about this trend as the cost of maintaining the share register and sending materials to members is increasing. He wishes to implement a rule to give the directors power to control the transfer of shares so that they can restrict the number of members. Advise Mick if he can successfully achieve his aim.

[Note: Transfer is the term used to describe the sale or purchase of a share from one shareholder to another.]

QUESTION THREE

Julie has been a shareholder in Indahouse Pty Ltd for some years and is upset to receive a letter from the company instructing her to transfer all of her 200 shares to Bob Marley. Julie makes inquiries and discovers that Bob Marley is a close friend of the Indahouse chairperson Al Gee. She also learns that the companys constitution contains a rule that provides the chairperson of the company may, as they see fit, order any member to transfer their shares to any person at a fair market price.

Jimmy, another shareholder, discovers that as the company requires more funds the directors plan to issue a parcel of shares to a single investor without the members being able to participate.

Julie does not wish to sell her shares. Is she bound to observe the order she has received?

Are the directors correct in issuing the shares, as they plan?

QUESTION FOUR

Spears Ltd has a constitution that does not repeal any of the replaceable rules of the CA but does provide for two additional matters:

(i) an objects clause provides that the companys activities are restricted to the recording and publishing of music.

(ii) another clause provides: Jackson White is to be the company's Senior Music Producer at a salary of $200,000 pa.

The directors of Spears Ltd have decided to ignore the constitution and to carry out the following actions:

to execute a contract with Little Brother Pty Ltd for the release of films on DVD

to insert into the companys constitution a clause so that each member will have to purchase an additional 1,000 shares at $3,000 to pay for the new business venture;

to appoint Britney Lance as Senior Music Producer.

Required:

(a) Spears Ltd loses money under its agreement with Little Brother Pty Ltd and refuses to pay it a sum owing, arguing that it has no legal capacity to release films and that Little Brother legally would have known about its limitations from the Spears Ltd constitution.

Advise Little Brother Pty Ltd.

(b)Can the directors amend the constitution? What is the proper process? If the amendment is correctly passed, would the members have to pay for the additional shares?

(c) Jackson White writes to Spears Ltd demanding his job back but is told he has no contract. He buys some shares in Spears Ltd and writes again, this time claiming he has a contract.

Advise Spears Ltd.

[Note:You do not have to consider whether the directors have breached their duties when answering this question.]

TUTORIAL FOURQUESTION ONERainbow Ltd is a company that manufactures and sells house paint. Bill Berger is the Sales Manager responsible for a team of sales representatives.

Last week one of the sales representatives was visiting a hardware store when they telephoned Bill to ask if Rainbow Ltd would pay the cost of taking the owner of the store to lunch. Bill gave his approval.

Later that afternoon another sales representative telephoned Bill to advise that he had learnt of a new chemical process that would reduce the cost of manufacturing paint. Bill discussed this development with Wally Wattyl, Rainbow Ltds Managing Director. Wally told Bill to check the process out and if he considered it suitable for the company he should buy it. Bill purchased the chemical process on behalf of Rainbow Ltd.

The following week Wally went on holiday and the directors asked Bill to look after anything important that may arise in Wallys absence. Bill signed a lease for a new factory whilst Wally was away.

The Board of Directors consider the above transactions.

(i) They advise that the company will not pay the restaurant invoice for the lunch as it is company policy that only the Managing Director can approve entertainment expenses and Bill had no authority.

(ii) The chemical process hardly reduces the cost of paint and Bill had no authority to purchase it.

(iii) The company will not comply with the factory lease as it is of a value that requires Board approval and in any event, Bill had no authority to sign it, being only the Sales Manger.

REQUIRED:

(a)Briefly describe the ways in which a company is able to contract with outsiders.

(b)Separately analyse items (i) to (iii) above, describing for each the type of authority (if any) that Bill may have had and whether the company would be bound by each transaction.

QUESTION TWO

Tipsy Ltd is an importer and distributor of French wines. The Managing Director is Marie and the Company Secretary is Pierre. The company has no constitution and the Board of Directors exercise tight control over the company. The Board has implemented an instruction that their approval is required for any purchase of wine in excess of $50,000.

During the last month the following three transactions and developments occurred:

(a) Marie signed a contract to purchase $55,000 of wine. The other directors do not like the wine and refuse to accept it on the grounds that Marie lacked authority by breaching the purchasing limit set by the Board.

(b) Pierre, in France on holiday, visits one of Tipsy Ltds suppliers. He tastes and likes a new wine and signs a contract for Tipsy Ltd to purchase the wine for $10,000. The board of directors wishes to rescind the contract on the grounds that Pierre had no authority to sign the contract.

(c) The senior executives of Tipsy Ltd were absent at a management seminar and Renee, the companys Office Manager, was left to mind the whole office, including the sales department. When Smashed, a liquor store chain, phoned to place an order, Renee negotiated a price and sold some wine. Edith, the companys Sales Manager, had planned to sell that same wine to another customer at a higher price. Tipsy Ltd advises Smashed that they will not supply the wine as Renee lacked authority.

REQUIRED:Analysis each transaction, advising on Tipsy Ltds contractual obligations, if any.

[NOTE: Your answers should include a description of the type of authority (if any) for each transaction and include sections of the Corporations Act and cases where appropriate.]

TUTORIAL FIVEQUESTION ONEExpansion Ltd wishes to raise $11 million from the issue of shares. It does not want to prepare a prospectus. What are its alternatives?

QUESTION TWO

What effect does section 710 CA have over the content of a prospectus?

QUESTION THREE

What is meant by the defence of due diligence in publishing a disclosure document?

QUESTION FOUR

Stuff Up Ltd prepared a prospectus to raise funds for an exciting new venture. Several days after lodging the prospectus with ASIC in compliance with the Corporations Act, the directors of Stuff Up Ltd discuss at a Board meeting some information that the Managing Director believes should have been included in the prospectus.

Discuss the obligations of the company to lodge the prospectus with ASIC, why lodgement is required and what the directors should do if the information is deemed material enough to be included in the prospectus.TUTORIAL SIX

QUESTION ONE(a) What are the differences between cumulative preference share dividend rights and interest payable on debentures?

(b) What are redeemable preference shares and from what source can they be redeemed?

(c) Equality Ltd has issued 5 million class A shares with 2 votes per share and 1 million class B shares with 3 votes per share. The company has no constitution. At a general meeting, all members vote and by a majority of 10 million votes to 3 million votes, a resolution that all shares are to have the same voting rights, is passed. Rupert owns some class B shares and seeks your advice.

QUESTION TWO

(a)Explain the Doctrine of Capital Maintenance.

(b)Briefly outline the company processes necessary to undertake the following:

(i) Ralph holds 100,000 shares in Rich Ltd and the company wishes to buy-back 1,000 of these at $5.00 per share.

(ii) Each member of Poor Ltd holds 15,000 shares. The company plans to offer to buy-back 10,000 shares from each member.

(iii) Massive Ltd is listed on the Australian Stock Exchange and has decided to buy-back 8% of its issued shares through the stock exchange.

(iv) Cashedup Ltd issued shares for $1.00 but only called them up to 80 cents. The company no longer believes it will require the uncalled 20 cents per share and wishes to write it off.

TUTORIAL SEVENQUESTION ONE

What is the difference between?(a) a managing director and a chair(b) a nominee director and an alternate director

QUESTION TWO

Research the case of ASIC v Rich and explain what the judgement stated about the role of a chair in a listed public company?

QUESTION THREEAt a members meeting of Construction Ltd the shareholders passed 2 resolutions, each with a 90% majority. The first was that the company should invest its excess cash in the Hong Kong stock market and the second was to create a constitution with a clause stating that the companys activities are to be restricted to real estate development and investments.

At their next monthly board meeting the directors voted not to invest in the Hong Kong stock market. They also decided that the members had no right to create a constitution and restrict the companys activities, so they would also ignore the second resolution.

REQUIRED:Are the directors legally required to observe both resolutions of the members in general meeting?

TUTORIAL EIGHTQUESTION ONEFor a company director to satisfy their duty of good faith to their company each action taken must result in profit to the company and they must only consider the interests of the company and must ignore those of any other party.

Do you agree with this viewpoint?

QUESTION TWOThe 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 companys constitution. The directors reject Lees claim asserting that they only care about the companys 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.

QUESTION THREEBananas Pty Ltd manufactures pyjamas and has a successful export business and worldwide recognition for the quality of its products. Benita One is the companys 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 companys 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 Benitas 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.

TUTORIAL NINEQUESTION ONE (this question follows on from last weeks topic)The directors of Exotica Luggage Ltd are holding their monthly board meeting. In addition to reviewing the companys monthly financial statements, the directors are to consider two other matters. The directors of Exotica Luggage Ltd are Louis Viewtown, Priscilla Prada and Jordan Charles.

The first is a contract with Emu Leather Pty Ltd for the annual supply of emu leather suitable to be made into handbags. Emu Leather Pty Ltd has a single shareholder Percy Prada, a son of Priscilla.

The second matter is for the company to employ Camilla Charles to act as a personal assistant to Jordan Charles (her husband) for 2 afternoons per week. Camilla will be paid $A200 per week for her services.

REQUIRED:(a)The Emu Leather Pty Ltd Contract

Applying the provisions of the Corporations Act, advise Priscilla and the other directors of Exotica Luggage Ltd of the procedures they should follow when considering the emu leather contract at the directors meeting.

(b) The Camilla Charles Contract

Applying the provisions of the Corporations Act, advise Jordan Charles and the other directors of Exotica Luggage Ltd of the procedures they should follow when considering the employment of Camilla Charles at the directors meeting.

QUESTION TWOThe directors of Brazil Coffee Ltd are to hold their monthly board meeting next week. There are 3 directors: Ronald Oh, his brother Robert Oh and Carlos Pele. Ronald Oh has informed the other directors that he will not be able to attend the meeting as he will be representing the company at a rugby tournament in Hong Kong, which is sponsored by Brazil Coffee Ltd.

At the board meeting Robert Oh and Carlos Pele decide that the company will enter into its biggest ever contract - a $1 million purchase of coffee beans. The transport insurance premium is so high that it is decided the coffee beans will be shipped from Africa to Australia uninsured. Ronald is advised of these developments upon his return.

The coffee bean supplier was paid $500,000 as an initial payment with the remainder payable within 6 months of delivery. The ship carrying the coffee beans sinks and an examination of the contract reveals that ownership of the goods passed to Brazil Coffee Ltd when the ship was loaded and that insurance was the responsibility of the purchaser. The coffee bean supplier has demanded the remaining $500,000.

Brazil Coffee Ltd is unable to pay its debts and a liquidator is appointed. The liquidator is considering whether he should cause Brazil Coffee Ltd to sue its past directors to contribute to the payment of the debt. He is contemplating whether Ronald has responsibility even though he did not attend the directors meeting; that such a large purchase contract should not have been approved by the board; and, that the shipment should have been insured.

REQUIRED:With respect to the above facts, discuss:

(a) Directors duty of care and diligence [Include in your answer, any defences available to the directors];

(b) Whether in your opinion the directors have permitted the company to trade when insolvent [include in your answer, details about the offence of insolvent trading and the defences available].

TUTORIAL TENQUESTION ONE(a)Describe the legal significance of both a share certificate and an entry in a companys 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?

QUESTION TWO

Five years ago, Jumbo Pty Ltd borrowed $1million from Aus Bank. Aus Bank secured the loan by taking a non-circulating security interest over the motor vehicles and machinery and a circulating security interest over all the inventory and debtors of Jumbo Pty Ltd. Maggie, a director of Jumbo Pty Ltd, advised Aus Bank that she will register the interests on the PPS Register. Maggie, by mistake, registers the circulating security interest but overlooks the registration of the non-circulating security interest.

Two years ago, Jumbo needed extra funds to expand its business. It borrowed $500,000 from New Bank, secured by a circulating security interest over all its assets. New Bank registered the circulating security interest on the PPL Register. Jumbo has now become insolvent.

REQUIRED:

Advise whether Aus Bank or New Bank has a right to Jumbos assets.

QUESTION THREE

What is a dividend and in what circumstances may a dividend be paid?

TUTORIAL ELEVEN

QUESTION ONEThe members of Revolution Ltd are dissatisfied with rule 15 of the companys constitution which gives the directors the power to issue shares to any person as they see fit. The members wish to amend this clause so that the directors must offer any new shares to them first.

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.

QUESTION TWO

Hiphop Pty Ltd (a company without a constitution) distributes music CDs. 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 CDs 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 Hiphops 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 Hiphops 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.

QUESTION THREE

Under the proper plaintiff rule the members of a company can sue the directors for breach of duty so the statutory derivative action of the CA is unnecessary.

Do you agree with this viewpoint? Explain the statutory derivative action as provided in the CA.