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Part A

(a) According to s148 (2) and 149(1) of the Corporation Act, Bimbi Fashion Pty Ltd is a proprietary company with limited shareholder liabilities given that its company name ends with the word Pty Ltd. Its important to identify what type of company it is because s162(1) states that only certain conversion are permitted, such as a proprietary company limited by shares is not allowed to be converted to an unlimited public company unless it fulfils the special requirements under s162(2). If Bimbi Fashions Pty Ltd wishes to change its company type to a public company limited by shares, it will then need to pass a special resolution where it should have, according to s9, at least 75% of the votes from its members. A copy of this special resolution will then be lodged as part of the application with ASIC within 14 days after it is passed, along with other applicable requirement stated under s163(2) such as the companys new name and the companys constitution. If the application and requirement are in accordance with s163, ASIC will be required under s164(3) to publish a notice in the ASIC database and Commonwealth Gazette which states that it intends to alter the details of the company's registration. After the one month date, if there have been no objections from its members or creditors, ASIC will issue a new certificate to Bimbi Fashion to confirm the conversion under s164 (6). This is the date the change takes effect.

(b) If Bimbi Fashion includes Bella Donna as an equity partner, the relationship between these two entities will most likely be partnership. Its easy to confuse partnership with joint venture as they both consist of two separate entities in order to undertake commercial activities. Bimbi Fashion and Bella Donna both carry a similar business and the purpose of Bella Donnas finance contribution is to support the Bimbi Fashions expansion with the view to make a profit. Even though it did not specify in the case whether the profit will be shared but its reasonable to assume that Bella Donna will be entitled to a share of the profit if profit was made. Canny Gabriel Castle Jackson Advertising Pty Ltd v Volume Sales (Finance) Pty Ltd [1974] 131 CLR 321 established the clear difference between the partnership and joint ventures, the court held that even though the contract stated that both parties were to treat as a joint venture, factors such as the commercial purpose of the contract and the agreement to share profit constitute their relationship to be partnership and not joint ventures. (c) A disclosure document is a statement that a company issuer must provide for the potential investors under Chapter 6D of the Corporations Act. It contains key information about the nature of the company, the operating system and a range of other business related information that is intended to help investors to make an informed decision (ASIC 2011). Unlike public companies, private companies do not raise money from the public, they are not subject to the

same disclosure requirement as public companies. Investors in private companies are considered to be sufficiently well informed about the business operation and their investment decisions thus they do not require the protection of disclosure laws (Bordwin 1996). (d) Under Chapter 6D of the Corporations Act, s706 to s708A states that capital may be raised by companies with or without disclosure, different legislations apply to each case. The company must satisfy the provision under s708 if it wishes to raise capital without disclosure. Raising capital utilising s708 alone is not very effective due to the fact that s708 limits the scope of the public offering, such as the way the company approach the potential investors (Cran 2010). s705 outlines the types of disclosure documents that are required to be prepared by the company if it fulfils the requirements under s706 or s707. All of these documents have to be registered with ASIC under s718, and after the necessary approvals have been obtained, they may be used to raise capital funds from the public according to s721. (e) S710 to s716 under chapter 6D of the Corporation Act outlines the information that must be included in each type of disclosure document. Generally, the company must clearly explain the company's business and how the funds from the offering will be used. If there are any financial projections included in the disclosure documents, the company must present its justification. All documents and relevant figures should be proofread to avoid errors and omissions. Developing the disclosure document can be demanding in this sense. However, investing in a business is risky in nature, and the law seeks to make sure that investors are well informed and have enough information to make an investment decision (Bordwin 1996). (f) It is an offence and considered as a contravention of s728 of the Corporation Act for a person to offer securities under a disclosure document with the presence of misleading statements, or the absence of the material information that should be included by disclosure law, and such statement or omission is significantly adverse from the point of view of an investor. s731 to s733 provides a number of available defenses if the person is seeking to escape liability in contravention of s728 such as due diligence. s739 provides ASIC with the power to stop a disclosure document which is misleading or which omits material information. Where a disclosure document fails to meet the requirements set out in according to s710 to s716, ASIC will exercise that power with effect immediately if in the circumstances the failure is material (ASIC 2011).

Part B
Facts
Bimbi Fashions Limited issued a Prospectus which offers ordinary shares to the public in order to fund its international business expansion. In the Prospectus it stated that it had acquired an exclusive franchise with Versace Fashion and as a result substantial profit would be made. The Prospectus also included a report with positive opinions from an auditor, along with legal advice from the Solicitors, however the advice from the Solicitors appeared to be flawed later on. The company issued more than one million shares as an end result but unfortunately the new venture did not carry on as how it was stated in the Prospectus. Issues The new franchise with Versace Fashion was not successful and the shareholders who purchased shares on the faith of this venture would have suffered a financial loss as a result. Is there a misstatement of deceptive nature in the prospectus and who will be liable for it? There are four parties involved in this case, Bimbi Fashions Limited, the auditor, the company directors Anthony and Bianca, and the Solicitors. Each will be considered in turn. Relevant Laws The Corporation Act provides guidelines about the legal responsibilities, powers and duties for companies and its directors. In summary, directors must act with diligent, reasonable skill and care at all time in managing the business affairs or making any business decisions, if a mistake was made and caused financial loss, directors must proved on a reasonable ground that the decision was made with information that were believed to be true and fair and the time. People outside the business such as the auditor and the solicitors who provide professional advice and information on the companys ventures automatically owe the company a contractual duty of care, they are to do their jobs with competent knowledge and reasonable care or they could be in breach of that duty of care and be liable for their negligence. Application By definition, Bimbi Fashions Limited is a legal entity created by law to represent individuals for business purposes, s124 of the Corporation Act states that as a company, it has the power to perform various actions such as issuing shares and debentures. But company being an artificial entity, must function through individuals, in this case, the directors Anthony and Bianca, they are responsible for the business operation and therefore constitute the companys directing mind and will (Hinchy and McDermott 2009). s126 states that the power to enter into contracts or franchise can be exercise

through Anthony and Bianca. In the case of any rising legal issues, Bimbi Fashion Limited will be liable for any possible loss and the directors will also be questioned upon if they were responsible for the cause. According to the precedent case Lennards Carrying Co Ltd v Asiatic Petroleum Company Ltd [1915] AC 705, the defendant who was the director, was the directing mind and will of the company and his action was deemed to be the action of the company itself. The Prospectus included a statement from the auditor. The auditor owes Bimbi Fashion a statutory duty to act diligently and with professional knowledge upon acceptance and commencement of the audit. Therefore auditors who breached that duty of care will be liable for losses suffered by the company if causation is proved. However an auditor doesnt owe a duty of care to the potential shareholders. Ultramares Corporation v. Touche [1932] 174 N.E. 441 was a precedent case in this area where the auditors gave an unqualified opinion having failed to discover that management had falsified entries to overstate accountants receivable. The audit was found to be negligent, but not deceptive. The court held that the claim in negligence failed on the ground that the auditors owed the shareholders no duty of care. Its questionable whether the auditor had performed to the best of his knowledge or whether he should have queried further in regards to the financial projection in this case, however Bimbi Fashion Ltd and the shareholders should always take into consideration that the auditors opinion only improves the reliability of the financial report not to guarantee the future success of the company (Hinchy and McDermott 2009). S180 to s184 of the Corporation Act contains provisions that outline common law duties and fiduciary duties for directors. These guidelines are designed to promote good governance and ensure that directors act in the interest of the company and putting the companys interest ahead of their own (Crucitti 2011). In managing the business operations and exercising the specific powers as outlined in s198A to s198F, directors are obliged to exercise a degree of care, skill and diligence, having regard to what it is reasonable to expect in the circumstances. In this case, as the directors of the company and the issuers of the company prospectus, Anthony and Bianca must ensure that the Prospectus does not include any defective or misleading information or it will be considered as a contravention of s728. Unfortunately the prospectus included a misstated advice from the Solicitors and therefore Anthony and Bianca are liable for any suffer or loss incurred as a result under s729. However s731 to s733 of the Act outlines a number of defenses available that they can use to avoid personal liability. s733 (1) in particular allows directors to rely on information given to them by a person outside the business course such as the Solicitors in this scenario. s189 also gives the directors the right to rely on information and advice from an expert as long as they act in good faith and believe that it was a good choice for the business. For that reason, if a statement in the prospectus turns out to be inaccurate, Anthony and Bianca will need to show that with good faith it was based upon reasonable information

and advice at the time it was made. If they cannot demonstrate this, they are likely to incur personal liability for these misstatements. Wright v Darwent [1869] 3 SALR 121 was a similar case where the directors of a company issued a prospectus which stated that a new venture was discovered and was exclusive to the company. Shares were bought on the faith of this prospectus but subsequently appeared that the venture was of no utility. The court held that the directors, at the time the prospectus was published, fully believed in the truth of the statements and published it with no deceptive intention and therefore not liable. The relationship between a solicitor and their client is predominantly a contractual one. Just like the auditor, it is an implied term that the solicitors will do their jobs with reasonable skill and care or they will be liable for a breach in duty of care. In this case the solicitors advice was included in the prospectus, so its reasonable to assume the company will be depending on these advices to execute the new business venture and the public will be relying on these advices in some way to make their purchase decision. In Barnes v Hay [1988] 12 NSWLR 337, the solicitor was held liable for the failure to warn the plaintiff of the legal consequences of not taking up the lease agreement before the premises was sold, as a result the plaintiff became a trespasser and was harassed by the new owners. If Bimbi intend to sue the solicitors for their negligent advice, some other factors must take into consideration such as the foreseeabilities and the remoteness of the damage (Moshinsky 2010). Is it foreseeable that the advice of the solicitors would cause the fall out of the business venture between Bimbi Fashions and Versace Fashions? Conclusion It is undeniable that in the business venture, every decision made by the directors will involve some risk. The court understands that even the decisions that are made by directors with high level of expertise may fail (Alfalfa House 2011). In this case Anthony and Bianca will not be liable for the misstatement in the prospectus and the fall out of the business venture as long they manage the business with full consideration and information and the decisions were made in good faith and for an appropriate purpose. The auditor is not likely to be liable for any damage. The solicitors could be sued for negligence but it will be subject to the foreseeability and the remoteness of the damage between the negligent advice they gave and the failure of the business franchise.

Reference List
Books Cases Barnes v Hay [1988] 12 NSWLR 337 Canny Gabriel Castle Jackson Advertising Pty Ltd v Volume Sales (Finance ) Pty Ltd [1974] 131 CLR 321 Lennards Carrying Co Ltd v Asiatic Petroleum Company Ltd [1915] AC 705 Ultramares Corporation v Touche [1932] 174 N.E. 441 Wright v Darwent [1869] 3 SALR 121 Hinchy R and McDermott P 2009, Company Law, 2nd edition. Pearson Education Australia.

Journal

Bordwin, Milton 1996, "Your Duty to Disclose: What You Don't Say Can Land You in Court." Management Review, July 1996, 55-57.

Ferran, Eilis 2011, "Corporate attribution and the directing mind and will." Law Quarterly Review 2011, 239-259.

Others

Crucitti, C 2011, Duties of Directors, Company Law Lecture Power Point. Moshinsky, N 2010, Damages are awarded on proof that negligence of a solicitor is the cause of damage, The Laws of Australia.

Website Alfalfa House 2011, Directors duties and responsibilities. Available: http://www.alfalfahouse.org/html/directors_duties.htm Accessed 3 Oct. 11. ASIC official website 2011, What are disclosure documents? Available: http://www.asic.gov.au/asic/asic.nsf/byheadline/OFFERlist+Entry?openDocument Accessed 17 Sep. 11. Cran, Adrian 2010, Raising capital in Australia. Available: http://corporateoutcomes.com/News/Articles/12-April-2010-Raising-Capital-in-Australia.asp Accessed 25 Sep. 11.

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