Business School

School of Taxation and Business Law

TABL 2741
BUSINESS ENTITIES

TUTORIAL GUIDE
SESSION ONE 2017

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 TABL 2741 BUSINESS ENTITIES

Tutorial Guide
TUTORIALS

PURPOSE
The purpose of the questions in the tutorial guide is to help interpret and apply the lecture material.
Additionally, the tutorial problems and questions also allow you to practice for the final exam which
will consist of similar questions. Note: there will be no answers given out to the tutorial questions or
past exam papers in class or posted to Moodle. The purpose of the questions is to allow you to apply
the course material and gauge your own level of competence. Simply giving you the suggested
answers will defeat this purpose. It is your responsibility to attend tutorials prepared so that you can
gauge your own level of competence and are able to contribute to class discussion. However, if you
are uncertain and wish to explore a topic further or test your understanding of past exam questions,
please do not hesitate to consult with your tutor or lecturer.

The purpose of this tutorial guide is also to allow students to develop the skills (both verbal and
written) necessary to analyse problems which may arise in practice. The guide is designed to allow
each student to reach the goal of being able to apply theory, knowledge and problem solving
technique to fact situations that may arise in company law. It is essential that students learn to select
the important issues in such fact situations and that they be able to advance, in discussion, a carefully
analysed solution aimed at resolution of the factual situation based on both relevant legislation and
case law.

It is assumed that students will refer to the course outline and texts without specific direction.
The references (if any) listed in the tutorial problems are by no means exhaustive. It is expected that
students will take such references as a guide for initial research only.

The self review questions, as suggested by the title, are intended for students to answer prior to
tackling the weekly tutorial assessment questions. It is designed to assist students to understand, and
locate, the core issues within each lecture topic. Please consult with your tutor to test your
understanding if you are uncertain of the solutions.

TUTORIAL ASSESSMENT
Tutorials are compulsory. Weekly attendance will be recorded. These factors will be taken into
account when considering any application for special consideration. Students attending other
tutorials without permission (which will not be granted lightly due to limited class capacity and other
concerns) will not be credited for attending that tutorial. This makes it essential that you ensure that
you attend your allocated tutorial, particularly as marks are awarded for quizzes conducted in tutorials
during the session.

Formal Requirements
In order to pass this course, you must:
achieve a composite mark of at least 50; AND
achieve a mark of at least 45% (i.e. 27 out of 60) in the final exam; AND
complete all assessment tasks; AND
attend at least 80% of the tutorials.

Assessment Details
ASSESSMENT IN THIS COURSE CONSISTS OF 3 COMPONENTS:
FORMAL WRITTEN RESEARCH ASSIGNMENT,
TUTORIAL QUIZZES AND
FINAL EXAM

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 Assessment Task Weighting Length Due Date
1.Formal Written Research Assignment 20% 1,700 Wednesday 26 April by 6.00pm [Week 8]
words
2: Tutorial Quizzes (x3; worth 10 20% Each 10 Quiz 1 Week Beginning 20 March
marks each; best of 2) minutes [start of Week 4]
duration
Note: The higher of the two set of Quiz 2 Week Beginning 24 April [start of
quiz marks awarded (out of 20) will Week 8]
automatically be chosen and awarded
Quiz 3 Week Beginning 15 May [start of
Week 11]
3. Final Exam 60% 2 hours University Exam Period
Total 100%

Assessment Format

The written assignment is worth 20% of the course assessment.

The topic will be released via Moodle in Week 4. This is a formal written assessment which involves individual
legal research and analysis. It has a minimum word limit of 1,600 words and maximum word limit of 1,800
words.

See Style Guide posted to Moodle for further details on presentation.

It must be lodged at Turnitin before the due date and time: by 6.00 pm Wednesday 26 April 2017 (note:
No other form of submission, for example email submission, is allowed without prior lecturer consent).

Unauthorised late submissions will attract an immediate deduction of 20% and thereafter the same deduction
per day late. Any assignment submitted 5 or more days late will score 0.

Tutorial Quiz

Written quizzes conducted in tutorials are worth 20% of the course assessment.

Tutorial Quiz
There will be three (3) quizzes given in tutorials during the session, based on the lecture material [tutorial
questions are, indeed, based on lecture material]. Students are advised to use the information below to guide
preparation for the tutorial quizzes – it indicates the lecture material (as spelt out in the course outline) that will
be assessed in each quiz:

Quiz 1: Lecture Topics covered in lectures 1-3 inclusive

Quiz 2: Lecture Topics covered in lectures 4-7 inclusive
Quiz 3: Lecture Topics covered in lectures 8-10 inclusive

Each quiz will consist of short answer questions and/or multiple choice questions and will each be
worth 10% of the total mark of the course. These tutorial assessments will be closed book.
Further details will be announced in the lectures.

Each quiz will start no earlier than 5 minutes after the hour that the tutorial commences and
students arriving late to tutorials will be given only the remaining allotted time to complete the
quiz.

Students will be marked on the highest 2 scores attained out of the 3 quizzes held during the
session. Students absent in the tutorial on the date of the quiz will have 0 marks recorded for that
quiz. There will be no supplementary or make up quiz should a student miss a quiz because
only the best 2 out of the 3 quiz results will be used for assessment purposes.

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 Final Exam
The final examination is worth 60% of the course assessment and will consist of problem questions and essay
questions. It will be 2 hours long and cover the entire course material, unless advised by the lecturer to the
contrary in class.
It is a closed book exam (no external materials are allowed into the exam). However, a case list (comprising of
cases listed in this Course Outline) and extracts from the Corporations Act will be supplied in the exam room,
attached to the question paper. Thus, there is no need to commit case names or section numbers to memory.
The final examination will be held in the regularly scheduled University examination period. Further
information concerning the exam and its format will be announced in lectures in the final week of the course
and a summary of the key points will be posted to Moodle.

TUTORIAL 1

The aim of this tutorial is to familiarise students with:-

1. Tutorial Guide
2. Method of Course Assessment and manner of presentation
3. Scope of the course
4. Prescribed and Reference Materials
5. Introductory material

Self Review Questions

(a) Outline the aims, functions and role of the Australian Securities and Investment
Commission (ASIC).
(b) Review, at least, one contemporary example of ASIC enforcement action under the
Corporations Act.

Reference
www.asic.gov.au and Harris, Hargovan and Adams: Australian Corporate Law,
5th ed, 2016 (LexisNexis, Butterworths) – Chapter 2.

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 TUTORIAL 2 (CLASS 3)
Business Structures

Question 2
Rose, Mary, Violet and Sonny are the best of mates. Rose and Mary run the Busy Bee Florist
Shop in partnership with each other. Due to a long drought and unseasonal weather, the
business bank account is overdrawn and the Friendly Bank is refusing to honour any more
cheques. Rose approaches Violet for a loan in return for a share in the business. Violet
agrees to lend the partnership $20,000 in exchange for the drawing up of a loan agreement
which was to document, inter alia, the following terms:
the lender will receive a share of the profits and losses to the extent of 20 per cent;
the lender has a right to examine the partnership books at will;
the lender has a right to receive a quarterly business statement; and
the money advanced is a loan and the lender is not to be regarded as a partner of the
business.

Rose executes the loan document, as requested, prior to Violet advancing the money. Both
parties signed the loan document. Meanwhile Mary approaches Sonny, who is also their
employee, for a loan.

Sonny agrees to lend $10,000 to Mary but he requires some interest on the loan. A deal is
struck which results in Sonny receiving his salary plus a one-eighth share of the net profit (or
a one-eight share of the firm's losses) in consideration for making a loan to the firm.

Rose and Mary inform the Friendly Bank that Violet and Sonny are now partners in the Busy
Bee Florist Shop. Business continues to decline and Rose and Mary secretly decide to take
an extended holiday in the Congo Basin.

Both Violet and Sonny were unaware of the large debt owing to Friendly Bank and believed
the purpose of their loans was to expand the business of the Busy Bee Florist Shop. Friendly
Bank seeks to recover debts owing by the Busy Bee Florist Shop from Rose and Mary.

Advise Violet and Sonny regarding their liability to Friendly Bank in relation to the Busy
Bee Florist Shop. Your answer must make reference to relevant provisions of the
Partnership Act and precedents.

Question 2

Why is it said that in a pure joint venture everything is separate except for the joint

activity undertaken? Discuss.

Cases:
Smith v Anderson (1880) 15 Ch.D. 247;
Beckingham v Port Jackson and Manly Steamship Co. [1957]1 S.R. (NSW) 403;
Re Megevand: Ex parts Delhasse (1 887-78) 7 Ch.D. 51 1;
Australia & New Zealand Banking Group Ltd v Richardson [19801 Qd R321;

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Canny Gabriel Castle Jackson Advertising Pty Ltd and Fourth Media Management Pty Ltd v
Volume Sales (Finances) Pty Ltd (1974) 3 ALR 409.

Essential Reading
Harris, Hargovan and Adams: Australian Corporate Law, 5th ed, 2016
(LexisNexis, Butterworths) – Chapters 4 and 3

Self Review Questions

1. What factors are taken into account in determining whether or not a partnership
exists?
2. What is “joint liability” and how does it differ from “joint and several” liability in a
partnership?
3. How can a retiring partner avoid future liability?
4. Why is agency an important concept in partnership law?
5. Explain what a limited partnership is?

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 TUTORIAL 3 (CLASS 4) Business Planning and
Structures

Question 1
You have the task of advising clients as an accountant. Amongst your clients’ is a family –
with a mother and father both aged 50 (and with considerable wealth), and 4 children, aged
21, 18, 17 and 10. The parents wish to involve their children in their next business venture.
The parents anticipate contributing $2 million of their own capital and having the venture
borrow a further $2 million. The parents seek your advice as to how the venture should be
structured.

The investments under considerations are:

a retail business
a farm
a speculative mining venture
a long term investment portfolio

Examine, with express reference to the given facts, the relative advantages and
disadvantages of the structures available in law for acquiring and conducting these
proposed investments.

Your answers should include the relative complexity, flexibility, aspects of liability and
suitability for financing purposes for each particular structure contemplated.

Question 2

Jack and Jill are the only shareholders and directors of Uphill Pty Ltd which is a trustee of the
King Trust. The beneficiaries of the trust are Jack, Jill and their children. The capital and
assets of Uphill Pty Ltd are valued at $100,000. The company runs a fresh produce business
on behalf of the trust. The trustee is authorised, under the terms of the trust deed, to engage
in wholesale and retail trade in the fresh produce business.

The fresh produce business is a great success. As a result, Jack and Jill decided to expand the
business. They ordered $300,000 worth of goods on behalf of Uphill Pty Ltd from Mr Frosty
Pty Ltd, suppliers of refrigerated products. The trust assets, at the time of order, were worth
$200,000. Jack and Jill have substantial assets. Even though Uphill Pty Ltd took every care
with the expansion of the business, the business suffered large losses which resulted in the
closure of the business.

Advise Mr Frosty Pty Ltd as to its rights to recover the unpaid debt from the trust.

Essential Reading (note: same as previous week)

Harris, Hargovan and Adams: Australian Corporate Law, 5th ed, 2016
(LexisNexis, Butterworths) – Chapters 4 and 3

Self Review Questions

1. Identify four major differences between a public and proprietary company.

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2. What requirements must a proprietary company satisfy to be classified as a small
proprietary company?
3. What types of companies may be registered under the Corporations Act?
4. What is a discretionary trust and its primary purpose?
5. What is a trading trust and what structure does it generally take?
6. What are the duties, powers, rights and liabilities of trustees?
7. What is meant by “the rule against perpetuities”?
8. What are the features of an unincorporated joint venture?
9. Compare and contrast a partnership with a joint venture
10. Proprietary companies are by far the most common type of company, accounting for
over 98 per cent of all incorporated companies. Provide reasons for this result with
reference to the Corporations Act.

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 TUTORIAL 4 (CLASS 5) Corporate Personality

Question 1

Dozey, a sole trader, is the owner of a very successful business called ‘Sleepy Head’ which
specialises in selling mattresses and bed-ware. He has insured the business with Risk Ltd
against fire, theft and the like in the sum of $1,000,000.

Some five years later, Dozey decided to conduct the business via a corporate structure. He
incorporated a company called ‘Sleepy Head Pty Ltd’ which is validly registered with ASIC.
Immediately thereafter, in February 2014, Dozey enters into a sale contract with Sleepy Head
Pty Ltd which purchases the business from him. As consideration for the purchase price, the
company issued the following to Dozey:
a substantial block of shares as fully paid; and
debentures for a further substantial sum secured by a security interest in a non-
circulating asset.

After incorporation, Dozey caused the company to take out workers compensation insurance
get insurance
policy with Compo Ltd.

A series of ‘bad luck’ accidents followed. In June 2016, burglars broke into the premises of
‘Sleepy Head Pty Ltd’ and stole stock valued at $250,000. In July 2016, Dozey fell from a
ladder in the store while trying to retrieve some stock and injured his back. He has incurred
substantial medical costs. As a result of the Global Financial Crisis, business has declined
and Sleepy Head Pty Ltd is now insolvent and under the care of the liquidator.

The liquidator has rejected Dozey’s claim against Sleepy Head Pty Ltd in relation to the
enforcement of the charge (security). Compo Ltd, which has underwritten Sleepy Head Pty
Ltd’s worker compensation policy, has rejected Dozey’s claim for payment of his medical
bills. Risk Ltd has also refused the insurance claim of Sleepy Head Pty Ltd to recover the
value of the goods stolen.

Advise fully, with reference to legal authority, whether Dozey can:

(a) enforce his security interest against Sleepy Head Pty Ltd;

(b) enforce the claim of Sleepy Head Pty Ltd against Risk Ltd to recover the value of the
goods stolen ; and

(c) enforce his claim against Compo Ltd for the payment of his medical bills.

Question 2

Buster Crabbe is a scallop fisherman at Lakes Entrance. Each fisherman has a quota of
catching 1 ton of scallops per month. A fine up to $100,000 is prescribed for fisherman who
is caught exceeding this quota. This fine is to deter people from fishing out the supplies of
scallop. Buster would like to harvest more scallops, in excess of the prescribed limit, but is
fearful of being caught.

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Buster’s daughter, Shell, who studied Business Entities at university, suggests that if Buster
formed a company with himself in control, he would effectively double his catch without
breaking the law.

Explain the legal basis for Shell’s suggestion and comment upon the likelihood of success
of such a scheme with reference to relevant precedents.

Essential Reading
Harris, Hargovan and Adams: Australian Corporate Law, 5th ed, 2016
(LexisNexis, Butterworths) – Chapter 5

Cases: Salomon v Salomon [1897] AC 22

Gilford Motor Co. v Horne [1933] All ER 109
Jones v Lipman [1962] 1 WLR 83
Walker v Wimbourne (1976) 137 CLR 1
Industrial Equity Ltd v Blackburn (1977) 17 ALR 575
ACN 007 528 207 Pty Ltd (In Liq) v Bird Cameron [2005] SASC 204
Andar Transport Pty Ltd v Brambles Ltd [2004] HCA 28; BC200403490
Smith Stone & Knight Ltd v Birmingham Corp. [1939] 4 All ER 116
Spreag v Paeson (1990) 94 ALR 679
Dennis Wilcox Pty Ltd v FC of T (1988) 14 ACLR 156
Briggs v James Hardie & Co. Pty Ltd (1989) 7 ACLC 841
Adams v Cape Industries plc (1990) BCLC 479
Pioneer Concrete Services Ltd v Yelnah Pty Ltd (1987) 5 NSWLR 254

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 TUTORIAL 5 (CLASS 6) Corporate Veil and Directors Duties

Question 1
Indigo Pty Ltd, a company conducting business in the printing industry, was formed in 2000
by Mr and Mrs Blue. They were appointed as directors. The company employed an
accountant. The company’s financial records were kept on a computer, accessible to all
directors, and maintained by the accountant each month.
In October 2015, a third director was appointed to Indigo Pty Ltd. Green, the newly
appointed director, previously worked as a consultant to the printing industry. Due to his
strong marketing skills, Green was invited to become a non-executive director and
chairperson of Indigo Pty Ltd. Green also has a strong background in operational
management but has no experience in corporate financial management. Green accepted the
invitation because Mr and Mrs Blue were friends in need of help with business marketing and
also because ‘by all appearances’ the business was thriving. Prior to accepting the
appointment, Green met with the other two directors at a formal board meeting. The minutes
of the board meeting records that the company’s accountant was also in attendance and that
the only item discussed related to the general performance of the printing industry in New
South Wales.
Within 12 months of Green’s appointment as a director, Indigo Pty Ltd ceased trading in July
2016 with outstanding debts of $750,000 and appointed a voluntary administrator. The
administrator was thereafter appointed as liquidator in August 2016. The liquidator’s Report
produced a month by month analysis of the company’s financial performance for the period
September 2014 to September 2015. According to this information, Indigo Pty Ltd had
significant cash flow difficulties during this entire period and was not making a profit.
The liquidator, in taking legal action against all of the company’s directors for insolvent
trading, has successfully proved in court a breach of the requirements of s 588G of the
Corporations Act. The evidence showed that Mrs Blue accepted her appointment as a
director of Indigo Pty Ltd at her husband’s request but was happy at all times to leave the
management of the company to him. Furthermore, she did not believe that her participation
was required, especially since the law changed in 1995 to permit single director companies.
Each year Mrs Blue signed the company’s annual returns declaring the company was solvent,
but this document was not explained to her and she said: “I have faith and trust in my
husband whom I love very dearly and therefore I would sign documents whenever asked.”
Green and Mrs Blue now seek to rely on a statutory defence in s 588H of the Corporations
Act to defeat the liquidator’s claim for compensation payable to Indigo Pty Ltd on the basis of
insolvent trading:

With reference to the Corporations Act, relevant precedents and the facts above, advise:
(a) Green; and
(b) Mrs Blue, as directors of Indigo Pty Ltd, of their chances of success in avoiding
personal liability.

Essential Reading
Harris, Hargovan and Adams: Australian Corporate Law, 5h ed, 2016
(LexisNexis, Butterworths) – Chapters 18 (selectively)

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Recommended references
Hargovan, A. 'Director's Liability for Insolvent Trading, Statutory Forgiveness and
Law Reform' (2010) 18 Insolvency Law Journal 96-102.
Hargovan, ‘Relevance of Directors’ Unsecured loans, Guarantees and Honesty in
Determining Liability for Insolvent Trading’ (2009) 17 Insolvency Law Journal 36.
Mitchell, “The Water Wheel Case – What do we learn from it?” (2003) 16 Australian
Journal of Corporate Law 65.
Goldman, “Directors beware! Creditor protection from insolvent trading” (2005) 23
Company and Securities Law Journal 216.

Cases:
Statewide Tobacco Sevices v Morley (1990) 8 ACLC 827; affirmed Morley v Statewide
Tobacco Services Ltd (1992) 10 ACLC 1233; [1993] 1 VR 423
Commonwealth Bank of Australia v. Freidrich (1991) 9 ACLC 946 ("Eise's case")
Hawkins v Bank of China (1992) 10 ACLC 588
Metropolitan Fire Systems Pty Ltd v Miller (1997) 23 ACSR 699
Tourprint International Pty Ltd v Bott (1999) 17 ACLC 1543
Powell and Duncan v Fryer (2000) 18 ACLC 480
Manpac Industries Pty Ltd v Ceccattini (2002) 20 ACLC 1304
Deputy Commissioner of Taxation v Clark (2003) 45 ACSR 332
ASIC v Plymin, Elliot & Harrison (2003) 21 ACLC 1237; affirmed Elliot v ASIC (2004) 48
ACSR 621.
ASIC v Rich (2003) 44 ACSR 341
Williams v Scholz[2007] QSC 266; affirmed [2008] QCA 94
Hall v Poolman (2007) 65 ACSR 123
McLellan (in the matter of The Stake Man Pty Ltd) v Carroll [2009] FCA 1415.

Self Review Questions

1. Who is director for purposes of the duty to prevent insolvent trading?

2. Can a creditor automatically sue the directors for insolvent trading?
3. Are directors automatically liable if the requirements of s 588G are satisfied?
4. What does “debt” mean for purposes of s 588G?
5. How does the Corporations Act assist in determining insolvency?
6. What are the consequences of contravening s 588G of the Corporations Act?
7. What is the significance of the decisions in Deputy Commissioner of Taxation v Clark
(2003) 45 ACSR 332 and in ASIC v Plymin, Elliot & Harrison (2003) 21 ACLC 1237 for
company law?

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 TUTORIAL 6 (CLASS 7) Corporate Liability

Question 1:
James was elected as a director of ‘Super Ltd’ at the Annual General meeting. His
appointment was invalid because there was a mix-up when calculating the members’
votes (the mix-up went unnoticed by the chairman). The rest of the people forming the
Board of directors are Susan, Nikki and Brian. The company secretary is Lee.

James was directed to find new premises for the business but was given no authority to sign
the lease contract without the Board’s approval. After a month, James finds suitable
premises and requests Mandy, the owner of the property, to send the lease documents to
the company. Lee receives the documents, shows them to James, who signs the contract
and asks Lee, as a company secretary, to also sign the lease. Lee signs the contract and
sends the documents, together with the required deposit to Mandy.

When the other directors discover this, they are unhappy, as they believe the premises are
overpriced and unsuitable. Further, they discover that James’ appointment is invalid. Based
on this, they now believe the company should not be bound by the contract.

Advise Mandy, with reference to relevant case law and provisions of the Corporations
Act, as to whether she can enforce the contract against the company?

Essential Reading
Harris, Hargovan and Adams: Australian Corporate Law, 5th ed, 2016
(LexisNexis, Butterworths) – Chapter 7
Corporations Act: ss 124-129

Cases:
Royal British Bank v Turquand (1856) 119 ER 886
Northside Developments Pty Ltd v Registrar-General (1990) 8 ACLC 611
BNZ v Fiberi Pty Ltd (1994) 12 ACLC 48

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 TUTORIAL 7 (CLASS 8) Corporate Fundraising and Investor
Protection

Question 1 [Self Review Question]

The following advertisement appears in the Australian Financial Review:

Opportunity

Capital required for a new corporate venture in New South Wales.

Returns of at least 50% guaranteed. Shares will be issued. Phone (02)
9385-3577 for a brochure.

Discuss, with reference to policy considerations and relevant provisions of the Corporations
Act, whether such an advertisement is permissible? If not, should it be permissible? What
objections, if any, can be raised to this form of advertising for corporate finance?

Question 2

Worldwide News Ltd, a foreign company based in the United States, issued a prospectus in
Australia which it offered ordinary shares to the Australian public. The purpose of the issue
was to finance the expansion of the company into television broadcasting. The prospectus
stated that the company was an applicant for a new television broadcasting licence and, if
granted, the company claimed there would be substantial earnings arising from this new
business venture. The prospectus included a report from an auditor who confirmed that the
income and profit forecasts were fair and reasonable based on the information provided by
the directors. The prospectus also included an advice from the directors of Worldwide News
Ltd that there was no chance of the company being unsuccessful in its application of this
licence.

Worldwide New Ltd’s application for the licence failed and it now appears that the
company’s solicitors’ advice was negligent in that it failed to take into account the rules
regarding foreign ownership of television broadcasting licences in Australia. Over two
million shares were issued pursuant to the prospectus offer which is still open for
subscription.

(a) Who, if anyone, faces liability for the statements in the prospectus and what are the
possible outcomes? Answer with reference to the Corporations Act; and
(b) What causes of action are open to ASIC, the regulator?

Essential Reading
Harris, Hargovan and Adams: Australian Corporate Law, 5th ed, 2016
(LexisNexis, Butterworths) – Chapters 9 and 10
Corporations Act: Chapter 6D and 2L

Recommended references
Hargovan, A and Adams, M ‘Taking Corporate Governance Seriously During
Fundraising: Exposure to Personal Liability for Cost Orders” (2004) 22 Company and
Securities Law Journal 355.

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 Ramsay, “Use of prospectuses by investors and professional advisers” (2004) 22
Company and Securities Law Journal 151.
Karl, Kazakoff and Chapple, “Market response to offer information statements”
(2003) 21 Company and Securities Law Journal 231.

Self Review Questions

1. What are the main aims of Chapter 6D of the Corporations Act?

2. What types of disclosure documents can a company issue?
3. When is a disclosure document required?
4. What are some of the policy considerations for exempting the need for disclosure
documents for certain offers of securities?
5. In general terms, what information must a prospectus contain?
6. What type of activities can give rise to civil and criminal liability during corporate
fundraising?
7. What is meant by “due diligence” and why is it significant during corporate
fundraising?
8. What is the role of ASIC and what powers does it have during corporate fundraising?
9. How does the Corporations Act ensure that disclosure documents remain reliable and
up to date?
10. What are the main statutory obligations on the borrowing company when issuing
debentures?

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 TUTORIAL 8 (CLASS 9) Directors Duties:
Content and Enforcement

Alex is the managing director of Sports Ltd, an Australian company in Sydney, which is in
the business of constructing sporting facilities for all types of sport. Alex has special
expertise in preparing tender bids on behalf of Sports Ltd and has been very successful over
the years.

Having successfully completed several construction projects in the Olympic Games in

Sydney, Sports Ltd prepared a tender contract in June 2014 to build a football stadium for the
RIO Olympic Games. Alex is responsible for the cost and profit analysis for the tender
contract and for preparing and lodging the tender bid on behalf of Sports Ltd. The closing
date for the lodgment of tenders was 1 August 2014.

Alex realised that this is a highly profitable tender project. In July 2014, Alex incorporated a
company called Games Pty Ltd in which he is the sole shareholder. He appointed his old
friend, Bob, who is an experienced builder, as the managing director of the newly formed
company. Alex encouraged Bob to prepare a tender, on behalf of Games Pty Ltd, for the
company to build the football stadium for the RIO Olympic Games. Bob successfully
tendered for this construction contract on behalf of Games Pty Ltd in July 2014, based on the
financial information supplied by Alex.

Games Pty Ltd won the construction tender, as its bid was lower than Sports Ltd, and is
awarded the construction contract by the London Olympics Committee. Since winning the
tender, Games Pty Ltd has successfully completed construction of the football stadium and
has made an overall profit in the sum of $300,000.

The directors of Sports Ltd have recently become aware of Alex’s participation in the
successful tender bid by Games Pty Ltd.

(a) Advise Sports Ltd whether the company can sue Games Pty Ltd and recover the
profit of $300,000 made by Games Pty Ltd. Your answer must be supported by
relevant precedents;

And

(b) Assume that Sports Ltd has recovered $200,000 only from Games Pty Ltd as the
company has spent the rest of the profits and does not have any other substantial
assets. Advise Sports Ltd, which has come third in the tender process and
therefore would not have been awarded the tender in any event, whether the
company has any legal causes of action against Alex to recover the shortfall of
$100,000. Answer with reference to both common law and the Corporations Act.

References: See Course Outline and cases therein.

Essential Reading
Harris, Hargovan and Adams: Australian Corporate Law, 5th ed, 2016
(LexisNexis, Butterworths) – Chapters 5; 15-17 (selectively)

TUTO

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 TUTORIAL 9 (CLASS 10) Directors Duties:
Content and Enforcement

In December 2016 the Australian Government launched its National Innovation and Science
Agenda (NISA). NISA involves a number of initiatives intended to encourage
entrepreneurship and innovation, including a planned $250 million investment by
government over two years to help translate Australian health and medical research into
commercial reality.
The launch caught the attention of BIO Ltd, a public company that has been listed on ASX
since 2011. BIO Ltd was formed to invest in new opportunities in alternative medicine and
so far has a small stake in three or four research ventures.

BIO Ltd has five directors. Its executive directors are Arthur and Brenda and its non-
executive directors are David, Elizabeth and Frank. Arthur is the managing director and
Elizabeth is the chairperson. Brenda’s title is ‘Director, Innovation’. All the directors are
based in Sydney except for Frank who lives in California.

Arthur, Brenda and Frank are substantial shareholders of BIO Ltd. Until 2012, David was the
general counsel of a large multinational agribusiness company. He now owns a farm in the
Riverina and in recent years has been pursuing his lifelong interest in the breeding of Merino
sheep. His sheep business is operated by a small proprietary company, in which he and his
wife are equal shareholders, called Davmeri Pty Ltd.

In February 2017 Brenda attended a meeting about NISA and decided that BIO Ltd should
apply for funding. From discussions with David she knows that Davmeri Pty Ltd has been
participating in a small research trial on the medicinal properties of lanolin, a natural
compound that occurs in sheep fleece. She thinks this might be an interesting idea to pursue.
just proposal/ expression of interest
, not contract,
Straight after the meeting, without checking with any of the other directors, Brenda signs an
‘expression of interest’ form and submits it to NISA. In the form she says that BIO Ltd is
looking to invest in early stage research into the medicinal properties of lanolin and will
match any NISA funding up to $500,000 in a suitable project. NISA confirms receipt of the
proposal and says that BIO Ltd will be notified in due course whether the government agrees
to fund the project. there is no such thing as passive/ sleeping directors
he is responsible as well (daniel v anderson)
Brenda then asks the company secretary to arrange a meeting of the board to discuss the
proposal and confirm her decision to submit the expression of interest. Notice of the meeting
is sent to all the directors except Frank, who sees himself as a ‘silent partner’ and who rarely
attends board meetings. Arthur and Elizabeth are aware that David is a director and
shareholder in Davmeri Pty Ltd, and that Davmeri Pty Ltd has an interest in sheep breeding.
However they do not know that Davmeri Pty Ltd is specifically interested in research into the
medicinal properties of lanolin, and will benefit directly if that research is eventually
commercialised.
Text
Arthur, Brenda, David and Elizabeth hold a board meeting and resolve that BIO Ltd should
pursue the NISA funding opportunity. After the meeting BIO Ltd makes an announcement to
ASX that BIO Ltd ‘has agreed to partner with the Australian Government in a substantial
investment under NISA into research into the medical properties of lanolin’.
James Hardie Case - misleading and deceptive statement
Later that day, Frank reads the announcement. He immediately calls Arthur and says that he
is against the proposal and that the ASX announcement is premature. Following the
overseas directors - doesn’t matter to public company

17
announcement, the price of BIO Ltd shares increases by 45%. Frank decides to sell his
shares, and does so at a sizable profit.

Three months later, NISA decides not to fund the BIO Ltd project. When the NISA decision
is announced, BIO Ltd shares fall in value by almost 60%. Many small shareholders in BIO
Ltd complain, and ask ASIC to investigate.

Advise ASIC on whether any of the directors of BIO Ltd have breached their duties:
Frank can’t make a personal profit (green v bestobell)
(a) at general law 1. he should hold a board meeting
2. pass further resolution
and 3. retract the misleading announcement

(b) under relevant provisions of the Corporations Act 2001 (Cth), together with the
potential consequences of breach.

References: See Course Outline and cases therein.

Essential Reading
Harris, Hargovan and Adams: Australian Corporate Law, 5th ed, 2016
(LexisNexis, Butterworths) – Chapters 15-17 (selectively)

Self Review Questions

1. What is the source of the duty to avoid conflicts of interest?

2. How may the risk of breaching the duty to avoid conflicts of interest be reduced?
3. What are examples of conflict of interest?
4. How may directors be excused and given relief for breach of directors’ duties?
5. What are the sources of a director’s duty of care?
6. What basic skills are directors expected to possess?
7. How are directors expected to discharge the element of “diligence”?
8. Can the same standard of care be expected of both executive and non-executive
directors?
9. To what extent can directors delegate and rely on others inside the company to do
their job properly?
10. Identify two important limitations which apply to the business judgment rule.
11. What is the significance of the decisions in Daniels v Anderson (1995) 37 NSWLR
438 and in ASIC v Adler (2002) 20 ACLC 576 for company law?

18
 (a) ch 15.1A
- easiest standard of proof
case: adler
equitable: common law
TUTORIAL 10 (CLASS 11) Directors’ Duties and (b) statue: parliament

Shareholders Remedies: Enforcement and - relief from liability

15.20
Consequences of Breach
- acted honestly, may relieve wholly and partly
take into account of circumstances
Question 1
(Enforcement and Consequences of Breach of Directors’ Duties)
With reference to the Corporations Act:

(a) Explain the concept of civil penalties, the key reasons for its introduction and the
method of its enforcement; and

(b) Discuss whether relief from liability can be given by the court and/or shareholders for
a director’s breach of duty and the limitations, if any, to the grant of relief.

(c) Can directors be imprisoned for breach of directors’ duties under the Corporations
Act? Explain.
(c) yes - criminal liabilities
Reading case: adler

Harris, Hargovan and Adams: Australian Corporate Law, 5th ed, 2016
(LexisNexis, Butterworths) – Chapter 16
Recommended References:
Hargovan, ‘Caution Against Board Groupthink – Civil Penalties in James Hardie’
(2013) 61 Keeping Good Companies 36.
Moodie & Ramsay, “The Expansion of Civil Penalties under the Corporations Act”
(2002) 30 Australian Business Law Review 61.

Question 2
(Shareholder Power and Remedies)
When directors exercise their decision-making power in companies, they must do so in
accordance with their statutory and general law duties. However shareholders, even majority
shareholders, do not owe equivalent duties to the company.

Is a majority shareholder allowed to vote however it wishes at a general meeting, without

worrying about the effect of the decision on the minority shareholders or on the company as a
whole? If not, why not?

Explain with reference to:

p. 548
(a) general law minority shareholder - gambotto

19.3 altering constitution

and

relevant provisions of the Corporations Act 2001 (Cth).

Reading
Harris, Hargovan and Adams: Australian Corporate Law, 5th ed, 2016
(LexisNexis, Butterworths) – Chapter 19

19
Self Review Questions

1. Who enforces a breach of director’s fiduciary duties?

2. What are the company’s civil remedies for a director’s breach of common law duties?
3. Who enforces a breach of director’s duties under the Corporations Act?
4. What are the limits to forgiveness for breaches of directors’ duties?
5. Can a director be excused by the company for breach of their statutory duty under the
Corporations Act?
6. What are the limits to insurance and indemnification (under the Corporations Act) for
breach of directors’ duties?
7. What are the legal limits on alteration of the corporate constitution?
8. What is the relevance of the Gambotto case for shareholders?
9. What remedies are available for oppressed shareholders?
10. How can a shareholder enforce a breach of directors’ duties?

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 TUTORIAL 11 (CLASS 12): Shareholders Remedies
and Directors Duties

Question 1

In 2015, three friends (Amy, Lee and Chu) incorporate Bold Fresh Pty Ltd to operate a
retail fashion shop that specialized in selling the latest trendy fashion designs. Amy and
Lee each held 45% of the issued shares in the company and Chu held the remaining 10%
of the shares. The company’s constitution stated that all three were directors of the
company, with Amy being appointed as the managing director.

Chu is very critical of Amy’s management but lacks the support of Lee in confronting
Amy about her style of management. Lee informs Amy about the Chu’s dissatisfaction.
To teach Chu a lesson, Amy and Lee decide to incorporate a new company called Bolder
and Fresher Pty Ltd in which Amy and Lee are equal shareholders. Bolder and Fresher
Pty Ltd trades in the neighbouring suburb and Amy and Lee divide their time between the
two businesses.

Chu is incensed when he hears about these developments but is unsure what he can do as
he feels that he has been outsmarted by his friends.

Advise Bold Fresh Pty Ltd, the directors of that company and Chu of their rights and
liabilities with reference to the Corporations Act and relevant precedents.

Essential Reading
Harris, Hargovan and Adams: Australian Corporate Law, 5th ed, 2016
(LexisNexis, Butterworths) – Chapter 19
Corporations Act: Part 2F.1; 2F.1A; s 461.

Optional reference
Ramsay and Saunders, “Litigation by Shareholders and Directors: An Empirical
Study of the Statutory Derivative Action”, Report published by Centre for
Corporations and Securities Regulation, Melbourne University.

Self Review Questions

1. What is the current legal status of the rule in Foss v Harbottle?
2. What are potential sources of a member’s personal rights?
3. Who can bring proceedings under the oppression remedy?
4. What conduct is covered by s 232?
5. Explain the relevance and operation of the oppression remedy. Why do the
oppression cases mainly involve members in proprietary companies?
6. What remedies are available under the oppression remedy?
7. Who can bring proceedings under a statutory derivative action?
8. Explain the difference between a member’s derivative rights and personal
rights.
9. Who may apply for a statutory injunction and under what circumstances can
the application be made?
10. What conduct is caught by s 1324?
11. Explain, with examples, the concept of ‘fraud on the minority’

21
12. Discuss the significance of the Gambotto case for company law.
13. Explain the meaning of the “just and equitable” (s 461(k)) ground for winding
up a company. How does this remedy differ from the oppression remedy (s
232) and in what ways are both remedies similar? Discuss.
14. Why was the statutory derivative action (SDA) introduced? Do you believe
that it will be successful in achieving its aims? Your answer should consider
the operation of this remedy and the factors which may influence a member to
bring a statutory derivative action (s 236) instead of an action for oppression (s
232)?

22
 TUTORIAL 12 (CLASS 13) External Administration

Question 1
Ben, Mary and Liang are the company directors in QuickCo Pty Ltd (QuickCo), having
founded the company several years ago. Lately, QuickCo has been experiencing unusual
cash flow problems and may not be able to pay all of it's creditors their full entitlements.
This is the first time in the company's history that the business' cash flow has not been
sufficient to cover all liabilities. The directors of QuickCo believe that the company's
position will improve as they are currently negotiating several large contracts that would
hopefully bring in sufficient cash flow to satisfy all present liabilities. Ben, Mary and Liang
are concerned about their future job prospects if the company becomes insolvent.

CreditCo Pty Ltd (CreditCo) is a secured creditor of QuickCo with a 1st registered mortgage
over QuickCo's office building (its most significant asset). CreditCo is concerned because
QuickCo has not made its monthly loan repayments over the last 2 months. CreditCo is
concerned about obtaining repayment of the debt, but does not want to pressure QuickCo as
the company is its largest business customer. If QuickCo goes out of business, CreditCo will
loose a substantial portion of its business. CreditCo is flexible about obtaining repayment of
its debt.

Ezifinance Pty Ltd (Ezifinance) is an unsecured creditor of QuickCo who also has not been
paid for the last 2 months and is concerned about the repayment of its debt by QuickCo.
QuickCo is Ezifinance's smallest client and the CEO of Ezifinance would like to clear the
debt off the company's books sooner rather than later.

Advise each of the following parties with reasons, and with reference to the relevant
sections of the Corporations Act, as to which form of external administration would best
suit their needs.

(a) Ben, Mary and Liang

(b) CreditCo; and

(c) Ezifinance

Your answer should also consider whether the party you are advising is able to initiate the
form of external administration you are advocating.

Essential Reading
Harris, Hargovan and Adams: Australian Corporate Law, 5th ed, 2016
(LexisNexis, Butterworths) – Chapter 22
ASIC website (insolvency) : www.asic.gov.au

Self Review Questions

1. Who may appoint an administrator?
2. What powers does the administrator have?
3. How is the company’s property protected during administration?
4. What is the purpose of the first and second meeting of creditors?

23
 5. How is the deed put in place during administration?
6. Who is bound by the deed?
7. What is the role of the court during voluntary administration?
8. Why is the independence of the administrator important?
9. How are schemes of arrangement initiated?
10. How do schemes of arrangement become binding?

1. What is the aim of liquidation and how can it be initiated?

2. What is the legal significance of a statutory demand?
3. What is the impact of liquidation on unsecured creditors?
4. How is a creditors’ voluntary winding up initiated?
5. What are a liquidator’s functions and powers?
6. What are voidable transactions? What are the aims of such provisions in the Corporations
Act?

24