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BTW2220 – Answering Company/Trusts/business law problems : ‘IRAC’ method

A logical way to demonstrate your understanding or business law principles in answering problem-
style questions is to use the ‘IRAC method’.:
I Issue(s) – identify the issue(s)
R: Rule – explain the relevant legal rule, using relevant cases and/or legislation. Explain
the legal principles/criteria/rules in YOUR words to show your understanding of them.
A: Application – apply the law to the facts of the problem stating how the facts do or do
not satisfy the legal tests/criteria and comparing/contrasting the facts of your problem to the
fact *(and outcomes) of relevant cases. This will justify your..
C Conclusion: draw a conclusion (your opinion) on that issue , then move to the next
issue to repeat the process.
issue, rule , application, conclusion, issue rule, application, conclusion, I R A C etc etc.

What does the IRAC method look like in an full answer – well this is something you are expected to have
mastered in the prerequisite units. Students articulating form TAFE are (and have been) encouraged to
write a full answer to tutorial problem(s) early in semester and obtain feedback form your Tutor/Unit
adviser about your method as well as the contents of your answer.

However, as requested, I have now created the beginnings of a ‘sample answer’ for a hypothetical
problem, and I have annotated it to clarify what I mean by ‘identify issue(s); ‘explain the law’, ‘apply the
law to the facts’ and ‘draw a conclusion’. The sample question is a simple one and I have tried to make
the sample answer brief –you should consider ways in which this ‘sample’ answer’ could be improved.

The problem:
Fred Flubber has been running a business for many years in which he manufactures rubber wares.
Late last year, Fred’s accountant recommended that he form a company to carry on that business.
A new company was duly registered with the name “Flubber’s Rubber Pty Ltd”, with Fred as the
sole director and the major shareholder. Fred is the sole shareholder, owning 1000 shares with an
issue price of $1, but paid to 20 cents. Fred also received 50,000 , $1 shares in payment for his
business’ assets.

In July this year, Fred ordered $1 M of raw rubber from the wholesaler for his business, as Fred
has done on many occasions. When the manufacturer confirmed details of the invoice, Fred said
that it needed to be made out to his company, Flubber’s Rubber Pty ltd. Unfortunately this
involve has remained unpaid. The manufacturer ins now suing both Flubber’s Rubber Pty Ltd and
Fred, claiming that claiming if Flubber’s Rubber Pty Ltd won’t or cannot pay, then Fred should be
personally liable for the debt – as he both ran the company and owned all the shares in it.

Advise Fred orf the extent (if any) to which he is liable for this debt.

Below is a sample answer to this problem. You may well disagree with some or all of the
conclusion – but the important thing about an answer to this problem is that it raises the
issues discussed below as these are raised by the problem set; AND that for each issue the
answer must explain the relevant law and apply that law to the problem’s facts (where
important facts are missing, consider all alternatives) and then draw a conclusion on that
issue (and an overall – BRIEF- conclusion at the end of the answer).

© J O’Relly
One solution, using ‘IRAC method’ described above. Please note, this is intended as a sample answer,
not a perfect, ‘Model answer’. [This answer has been prepared in Exam style (no case citations)]

identify all Fred ordered the rubber on behalf of the business. That business now operates a s a
areas/i ssue company, taher than as a sole tradership. In determin ing Fred’s potential personal
to be liability, we must consider the natu re of co mpanies and also the type of company here,
di sucsse d in o rder to ascertain Fred’s personal liability as a director and/or as a shareholder
inthe
solution Firstly I will discuss Fred’s possible liability being a d irector of Flubber’s Rubber Pty
Ltd. Th is involves the nature of compan ies as ‘separate legal ent ities’ and the
identify first existence of the ‘corporate veil’.
issue
Since Fred’s Flubber Pty Ltd was registered as a company, it exists as a separate legal
explain law, entity capable of making contracts in the same way that a hu man being (natural
using ca se s person) may make contracts and then sue or be sued on those contracts. This
and/or recognised by s124(1) Corporations Act, wh ich gives every registered company the
legislation full legal capacity of natural person. For Fred, th is means that Fred’s Flubber Pty Ltd
had the legal capacity to form the contract with the rubber manufacturer, and then it is
the company., Fred’s Flubber Pty Ltd, that is legally reponsible to fulfil that contract
apply each
(or be sued for breach of contract). Th is is similar to Salomon v Salomon & Co Ltd
legal point/
where Mr Salo mon was held to be separate form the co mpany which he ran and of
test/criteria to
which he owned nearly all the shares. Fred may be the sole director and run the
the facts of
company, but in the eyes if the law, Fred is separate to his company and he is NOT
problem, so
automatically responsible for debts like this rubber purchase debt. Although he
you can draw
operates and runs the company, like all co mpany directors and managers, he is
a conclusion
protected from personal responsibility for the co mpany’s actions by a protective
on each point
barrier known as the ‘corporate veil’ - un less there are g rounds to lift that veil. Th is
concl usion means that as a director, Fred is NOT responsible for this debt of the company unless
identify 2nd
on (first) there are grounds to lift the corporate veil.
issue
issue
For lift ing of the corporate veil, there must be certain circu mstances to allow the veil
explain law,
to be lifted either at co mmon law or under leg islation. At common law, g rounds for
using ca se s
lift ing the corporate veil include where a co mpany was created to commit fraud (eg Re
(and/or
Darby) , or to avoid a legal obligat ion (eg Gilford Motor Co v Horne) , or where the
legislation)
company has been knowingly involved in breaches of director’s duties. In this
scenario, there are no facts to indicate that any of these circu mstances existed, so
apply the law to the
unlike Re Darby or Gilford ’s case, there are no grounds to lift the veil at common
facts of problem
law. The only possible relevant statutory grounds for lifting the veil under identify 3rd
concl usion Corporations Act here might be insolvent trading . S588G proh ibits company issue
on 2nd i ssue directors from allowing the company to incur new debts at a time when the company
is unable to pay existing debts as they fall due (ie ‘insolvent’, a95A), o r if incurring
such new debt(s) would make the co mpany insolvent. On the facts, we are only told
explain law that Flubber’s Rubber Pty Ltd (‘FR’)has not paid the $1M invoice - we have
apply the law to the insufficient facts to decide whether the co mpany was engaging in insolvent trading , so
facts of problem we cannot be sure either way. If there were facts that FR was insolvent, then as in
[use a case as a comparison], Fred would be personally liab le for the insolvent trading
concl usion(s) debt under s588J,K and M. Without such facts, Despite being a d irector, Fred would
on 3rd i ssue not be personally liab le for th is $1M debt, only FR (the co mpany) would be liab le.identify 4th
issue
Being a shareholder of FR, Fred may be liable to contribute money to FR to pay repeat
outstanding debts if FR is would up. Since FR is a limited proprietary limited proce ss
company, the liability of Fred as a shareholder is limited to ... On the facts, this (I,R,A,C)
means that ..........

... then at end : overall conclusion - make sure you have ANSWERED the specific que stion a sked.
posed
© J O’Relly
© J O’Relly