QUESTION ONE:

Part A:

Ti is on the board of a company called Heaven’s Gate Ltd. The board of the company is extremely dysfunctional. At a recent board meeting, the majority of the board pass a resolution to enter into a contract to lease new office space. The new office is extraordinarily expensive. Ti believes that Heaven’s Gate Ltd will be rendered insolvent by entering into the lease. What would you recommend Ti do and why? (2 marks)

Part B:

Paige, James and Alex are directors of Big Change Pty Ltd (“BC”). They started the company when they graduated from Bond University. They all wanted to work together to achieve something new and fresh in the fashion industry. Paige, James and Alex each holds one share. Alex’s mum also holds 3 shares. They are the only shareholders.

BC runs a business selling woman’s fashion items – mainly pink sweaters. The constitution of BC provides that each director has authority to enter into contracts up to $20,000 in value, but anything above that requires board approval (all the other replaceable rules apply). Alex is appointed the managing director of BC.

The company is successful, and Alex thinks that she deserves to be rewarded for her effort. She enters into a contract on behalf of BC with Fancy Used Cars Pty Ltd (“FUC”) for the purchase of a Bentley in the amount $60,000. No board approval was obtained for this contract.

BC regularly makes tenders for government work. The government emails all garment tenders to BC when they are released. The Australian Army issued a tender for sweaters for the army. Paige and James see the tender on the BC email system. BC would never win the tender because it primarily makes pink sweaters and it is highly unlikely the government would want pink sweaters for the army.

After seeing the email, Paige and James start a new company called Camo Gear Pty Ltd (“CG”) and bid for the tender relying on the pricing information they have obtained from BC. Paige and James are the only directors and shareholders of CG. CG submits a tender for the army contract.

The tender is also discussed at a BC board meeting. The board agree that BC should not submit a tender for the contract. Neither Paige nor James mention CG or CG’s tender submission for the army contract.

CG wins the tender and CG makes lots of money selling sweaters to the army.

Alex finds out about CG and the tender and is upset. Paige quickly calls a shareholders’ meeting and, at the meeting, Paige and James vote in favour of a shareholders’ resolution allowing CG to keep the profit from the army tender (Alex’s mum is on vacation and doesn’t attend or vote at the meeting).

Answer the following questions:

1. Haveanydirectorsbreachedanyoftheirfiduciaryorstatutorydutiesinconnection with the BC army tender? (5 marks)

2. What would you have advised Paige and James to have done differently in connection with the BC army tender? (3 marks)

3. HowcouldAlexpursuethecausesofactionoutlinedinyouranswertoPart1above if the majority of the directors (i.e. Paige and James) voted against pursuing those causes of action? (4 marks)

4. AssumethatPaigeandJameslearnthatAlexhasconsultedalawyerinconnection with the CG action and they are annoyed. In retaliation they call a shareholders’ meeting and vote Alex off the board (Alex’s mother does not attend the meeting because she doesn’t think it is that important!!). Once Alex is voted off the board, Paige and James cease payment of dividends and increase directors’ fees dramatically. Would Alex be successful in an oppression action? (4 marks)

5. AfterAlexisremovedfromtheboard,BCgetsaletterfromFUCaskingforpayment of the Bentley. BC sends a letter back saying that Alex had no authority to enter into the contract and therefore BC is not liable for the purchase price. Advise FUC. (3 marks)

6. The company is successful, and Alex and her mother are annoyed that BC is not paying any dividends. They want to call a shareholders’ meeting to force the directors to pay a dividend. Can they do this and, if not, what would you advise them to do differently. (4 marks)

QUESTION TWO:

Carlos is an extremely talented engineer. He comes up with an exciting design for a new energy efficient engine. He has registered a patent for the engine design. He approaches his friends Luis and Maria to see if they would be interested in forming a business to exploit the engine design he has come up with. Maria is an experienced automotive engineer and Luis is a finance expert (he worked for several large investment banks at a high level). Both Luis and Maria believe that they can make money from Carlos’ design idea and agree to go into business with Carlos. They are each given a 10% interest in the patent by Carlos. Carlos seeks out investors / shareholders for his business. He finds people willing to invest $30 million. In fact, one individual called Elon is so enthusiastic about Carlos’ invention that he invests $10 million by himself. The condition of his investment is that he is allowed to nominate one director onto the board.

Carlos decides to call the new company Alset Motors Ltd (“AM”). On his way to ASIC to register the company, he sees a sign for the lease of office space which would be perfect for AM’s headquarters. As good office space is hard to find, he stops and talks to William Gates (“Gates”) – the owner of the building. As the price is good and the office is amazing, Carlos purports to enter into a lease between Gates and AM for the office.

Carlos then proceeds to the ASIC office and registers AM. The initial directors are Luis, Maria and Carlos. They all agree to enter into a contract between themselves and AM for AM to purchase the patent for $10 million. Carlos is appointed Managing Director and Chairperson. The investors invest the $30 million and are allotted shares, the patent is transferred to AM, AM pays Carlos, Luis and Maria $10 million for the patent and then Elon appoints Waza Buffett (“Buffett”) to the board as his nominee.

Part A:

Elon also owns a motor vehicle manufacturing company. Elon discovers that the AM engine design is so revolutionary, that if it goes into production it will dominate the market and hurt his own company’s sales. Elon tells his nominee, Buffett, to do everything in his power as a director to ensure that the AM engine never goes into production. Is Buffett obligated to follow Elon’s directions as his nominee or does he have other obligations to the company? (3 marks)

Part B:

Carlos discovers that Elon wants to stop the production of the engine. Carlos is concerned that Elon owns too many shares and could potentially vote the current board out and replacethem with individuals who are aligned with Elon’s agenda. Carlos is also concerned that the cost of bringing the engine into production is more than he first thought. Luckily Maria recently won $15 million in the lotto and has money to burn and is willing to invest more into the company!

Carlos shares his concerns with Maria and Luis and at a board meeting, the following. directors’ resolution is passed (Buffett votes against it and Maria doesn’t vote because of the potential conflict):

Alset Motors Pty Ltd (ACN 123 456 789) Written resolution

Share Issue

Resolved that:

As Alset Motors Pty Ltd requires additional capital for manufacturing purposes, Alset Motors Pty Ltd shall issue 10,000 ordinary shares to Maria in consideration of $1,000.00 for each share.

Signed: Carlos (Chairperson)

July 1, 2021

After the share issuance, Maria (who is 100% loyal to Carlos and Luis), owns 51% of the shares thereby preventing Elon from changing the direction or agenda of the company.

Did Carlos, Luis or Maria breach their directors’ duty to act for a proper purpose by awarding the new shares to Maria? (4 marks)

Part C:

At a directors’ meeting of AM, the board discuss the future manufacture of the engine. Carlos tells the board that the design calls for the engine to be made from high quality aluminium. The board delegate to Luis the role of finding an aluminium supplier that can meet the design requirements.

At the next board meeting, Luis reports back to the board that he has found a supplier. Luis says that the supplier can make a cheaper aluminium product (meaning more profit for the company) but it doesn’t have the exact same specifications as the design requires. Luis brings Jose to the board meeting. Jose is Luis’ next-door neighbour and is an expert hydrologist who works for the Federal Government Department of Water. Jose owes Luis a favour and makes a presentation saying that the cheaper aluminium will work fine in the engine. Maria has some reservations about the proposed aluminium but says nothing.At the meeting, after Jose’s presentation, the board vote to manufacture the engine using the cheaper aluminium.

The engine goes into production and it is discovered that the cheaper aluminium is not strong enough to withstand the forces that the engine generates and results in catastrophic failure. Numerous engines explode causing tremendous harm to individuals who sue AM for damages. The loses are enormous forcing AM into liquidation.

Would the liquidators be successful in a claim against the directors for breach of their duty of care, skill and diligence under s180(1) and the common law (remember to talk about possible defences) (8 marks).

Part D:

Can the liquidator recover the profit Carlos, Luis and Maria made on the sale of the patent? (3 marks).

Part E:

Prior to the liquidator being appointed, Carlos becomes irate at a board meeting and tells Maria it is all her fault that the company is failing because she should have insisted on not using the modified aluminium. Maria is infuriated that Carlos has placed all the blame on her and throws her notepad at Carlos hitting him in the head and says, “I quit.”

Was Maria’s purported resignation from the board effective in accordance with the Corporations Act? (1 mark).

Part F:

Can Carlos sue Maria in connection with being hit by the notepad as discussed in Part E? (2 marks)

Part G:

Was the contract between AM and Gates enforceable by or against AM?