1. Explain why promoters are fiduciaries and describe the paramount duty of these fiduciaries?

(500 words) A promoter has not been specifically defined in legal term, but is understood to be someone who undertakes to form a company with reference to a given project and to set it going, and who takes the necessary steps to accomplish that purpose. Generally, the person who actively undertakes the formation of a company by carrying out the procedure necessary for incorporation is promoter. However in Tracy v Mandalay Pty Ltd (1953), the court held that a person who takes no active part in the incorporation of a company and fundraising, but leaves this to others on the understanding that they will profit from the enterprise, may also be a promoter. The nature of being a promoter has potentially given rise to the risk that promoters are often able to abuse their position by making a profit for themselves at the expense of the company, the courts, therefore, in a series of late 19th century cases, laid down the principle that a promoter has a fiduciary relationship with the company and is therefore under an obligation to promoted company to act bona fide and to avoid conflicts of interest with the company. A conflict of interests puts a promoter in a situation where he might breach fiduciary responsibility, for instance, when a promoter unfairly profits from the conduct of business with the corporation by charging higher prices for the goods he sells to the corporation than it would otherwise pay. In the context of a promoters fiduciary obligations to a company, a promoter ensure that full disclosure is made of their interests in any contract entered into by the company illustrated by Erlanger v New Sombrero Phosphate Co (1878). This is a strict breach if non disclosure has been made to company disregarding whether or not the promoter was acting honestly or even whether they made a profit or not. In addition to disclosing their interest in a contract with the company, promoters also have a duty to disclose personal profits that may arise from their position. A promoter should make full disclosure to an independent board if this is possible as per Gluckstein v Barnes [1900]. If this is not practicable, full disclosure should be made to the shareholders. As a result of that promoters are someone who takes necessary steps to form the company, the fundraising provisions of the CA also require companies that seek to raise funds by the offer f their securities to provide investors with disclosure document. A prospectus is one of the main disclosure document in which, as per s711(2), the nature and extent of the interests that a promoter had in the formation or promotion of the company need to be set out. The prospectus must also set out the amount paid or agreed to be paid fro the promoters services in connection with the formation or promotion of the company or the offer of securities: s711(3) The fiduciary obligations arise automatically once a person is identified as a promoter. Aequitas v AEFC (2001) also said that it is not necessary to find a specific undertaking of a kind that would constitute a fiduciary relationship in the specific circumstances. In addition, the fiduciary duties of promoters are owed for the entire period during which a person is a promoter.

2. Julie and Emmanuel were the co-founders and directors of cyclone financial ltd, a company investing funds of their clients in lucrative but risky financial products. Most of the cyclone clients borrowed considerable amounts of money from banks to invest according to the advice given by cyclone (margin lending). In the second half of 2008, cyclone got into trouble as the global financial crisis had a very negative impact on the investments of cyclone and its clients. In early December 2008 the situation became very critical and the directors of cyclone, namely Julie, Emmanuel and the cyclone CFO mark discussed plans on how to drastically cut costs. They agreed to make 10of the 13 cyclone staff members redundant with immediate effect. Mark had worked with a small group of people the whole afternoon of Sunday. 14 December 2008 until the early hours of Monday to put together a rescue plan for cyclone and to prepare for a voluntary liquidation of things would get worse, before he retired to get some sleep. When mark returned to work on Monday 15 December 2008 at around 8:30am Lauren, a senior financial officer, told him that Julie had instructed a payment of $2million to be made to a personal bank account she shared with her husband Emmanuel. Julie had argued that the cyclone board of directors had approved a bonus of $10 million to be paid to herself and Emmanuel and that the $2million payment had come out of this. Mark become very uneasy about it and sought a legal opinion from a very well renowned law firm in Sydney. The law firm advised him that there was no legal basis for the payment, as it had depended on the successful float of cyclone shares, which had not occurred. In early January 2009 cyclone was forced into liquidation. It turned out that Frederic, the son of Julie and Emmanuel had withdraw all the money from his parents shared account to buy a luxury boat on which he currently lives. Julie and Emmanuel have no assets whatsoever. Disregarding* that cyclone was potentially insolvent on 15 December 2008 and disregarding possible criminal action, advise the liquidator whether Julie had breached her directors duties and if so whether cyclone can recoup some or all of the $2million.

ISSUE Whether or not Julie and Emmanuel had breached any directors duties of the CA What are the consequences and remedies? RULE(S): s180(1): A director must exercise their powers and discharge their duties with the degree of care and diligence that a reasonable person would exercise s180(2): Business Judgement Rule s181: (1) A director or other officer of a corporation must exercise their powers and discharge their duties: (a) in good faith in what they believe to be in the best interests of the corporation; and (b) for a proper purpose.

S182: A director, secretary, other officer or employee of a corporation must not improperly use their position to: (a) gain an advantage for themselves or someone else; or (b) cause detriment to the corporation. CA s1317E S1317J APPLICATION: Issue Re approve $10 million bonus to be paid to Julie and Emmanuel Julie and Emmanuel were directors for cyclone financial Ltd, as a result they need to comply with the duties that are imposed on directors. Duty to act bona fide (in good faith) in the best interest of the company Good faith there is no clear evidence suggest that whether Julie honestly believe she was acting in the best interests of the company in the subjective test approach. However this could be manifest that Julie has gone beyond what a reasonable person could possibly believe to be in the interests of the company. Mark, CFO of Cyclone financial Ltd, regarded as a reasonable person in the scenario, has clearly pointed out that due to the financial crisis, there is a severe financial difficulty to Cyclone and suggested preparing a voluntary liquidation. This can rebut subjective element with clear evidence of dishonesty. In the best interest of the company under normal circumstance, the interests of the company are the interest of the shareholders taken as a whole: Greenhalgh v Arderne Cinemas Ltd [1951]. Since Cyclone is currently suffering negative impact of financial crisis, Julie must not put her interest ahead the interest of shareholders as whole and approved the $10 million bonus to be paid to herself which give rise the potential loss to the shareholders when company went insolvent later on. As per s181 (1)(a) Julie must exercise their powers and discharge their duties in good faith in what they believe to be in the best interests of the corporation and (b to exercise their power for a proper purpose.). Again Mark, regarded as a reasonable person, has clearly pointed out the situation that the bonus approved is not in the best interest of the company. Improper use of position In addition, Julie must not improperly use their position to: (a) gain an advantage for themselves or someone else; or (b) cause detriment to the corporation. There is clear evidence here suggesting that Julie, as a director of Cyclone, gain the advantage of approving the bonus and withdrew the asset of company even though being told that the company is facing the financial difficulty and therefore cause detriment to Cyclone, which is further demonstrated by the insolvency of the company and went liquidation in early Jan 2009. Duty to avoid conflict of interest Julies position as director prohibits her from taking up opportunities herself: Furs v Tomkies (1936) & Cook v Deeks [1916]. By approving the bonus, there is a real, sensible possibility of conflict arsing, because Julie has place herself in a position where he has put her own interests ahead of the interests of Cyclone Ltd: Phipps v Boardman [1962]. The $10 million bonus is a material private interest and therefore there is a very real chance of Julie having a conflict of interest

Duty to act with due care, skill & diligence Court is moving towards a more objective industry approach, examming the standard expected of reasonable directors in a similar company. It is reasonable to expect that Julie, as being a director of a financial company based on here qualification and experience, did not exercise the expect standard with due care and skill: Vines v ASIC (2007). CA s180(1):A director must exercise their powers and discharge their duties with the degree of care and diligence that a reasonable person would exercise. As a reasonable person, Mark suggested the company to prepare a voluntary liquidation rather approving bonus to the directors. There is clear evidence that Julie breach the duty as she did not exercise the power with due care that Mark would have done. It could be counter argued Julie did not breach s180(1) if she meets the requirements under s180(2) when making the decision of approving the bonus. a) make the judgment in good faith for a proper purpose not satisfied, not in good faith for a proper purpose argued above; and (b) do not have a material personal interest in the subject matter of the judgmentclearly personal material benefit of $10 million ; and (c) inform themselves about the subject matter of the judgment to the extent they reasonably believe to be appropriate not appropriate pointed out by Mark; and (d) rationally believe that the judgment is in the best interests of the corporation -- again Mark suggested that it is not in the best interest of the company. They clearly breach the duty of care and skill if made a decision of approving the bonus to the directors. CONCLUSION: It would be very likely that Julie has breached the duty to act bona fide in the best interest of the company and exercised her power of a director improperly as per s181-182. In addition Julie is also likely has breached the duty to act with due care, skill & diligence and duty to avoid conflict of interest. Remedies: Creditors can recover those amounts of money because liquidator has been appointed and will take action against the director, then share the proceeds among the directors. Court may order that Julie hands over the bonus received in the breach of duty to the company. In the case, Frederic, the son of Julie and Emmanuel had withdrawn all the money from his parents and Julie therefore has no asset whatsoever. However a constructive trust makes it possible to recover property that has come in the hands of a third party who received it with knowledge of the breach of duty: Barnes v Addy (1874). Besides, the civil penalty provisions are listed in CA s1317E. ASICE can initiate proceedings for all types of civil penalties: s1317J(1) and companies can apply for compensation orders: CA s1317J(2)

3. Wayne and Jane were the only directors and main shareholders of Jane Wayne jeans (JWJ). JWJ imported and retailed very fashionable and high priced jeans for men and women. Most of the JWJ jeans were sold through David Jones and Myer, but JWJ also had a flagship store in Randall mall. The share capital of JWJ consisted of 100000 fully paid shares, Wayne and Jane each holding 45000shares. The business went really well until the end of 2007. However, in the 2008 JWJs high priced jeans did not sell that well anymore and in the financial year 2007/2008 JWJ suffered an operative loss of AUD1 million. JWJ had bought too much stock and was sitting on large quantities of jeans, which only sold slowly. In the financial year 2008/1009 JWJ improved but still suffered an operative loss of AUD 50000. To improve the overall result for 2008/2009 by AUD150000 Wayne and Jane revaluated the existing stock by using the whole sale price of the jeans that they had paid and not by using a current value reflecting that the existing stock had soon to be replaced by the new 2009/2010 summer collection. Wayne and Jane also revaluated the only other main asset of JWJ, namely the store in Randall mall (long term lease, shop equipment etc.), which improved JWJs 2008/2009 result by further AUD 100000. In order to satisfy the minority shareholder and main lender of JWJ, Wayne and Jane then decided to pay a dividend for 2008/09 of AUD2 per share. Have Wayne and Jane complied with the Corporations Act 2001(cth)? ISSUE The issue is whether there is a profit Jan Wayne Jeans Ltd (JWJ) is available for distribution as cash dividend. RULE(S): Dividends may only be paid out of profits: CA s254T. The meaning of "profit" in the sense of CA s254T has to be established based on cases like re Ammonia Soda Co Ltd v Chamberlain, QBE Insurance Group Ltd v ASC, Westburn Sugar Refineries Ltd v IRC and Dimbula Valley case APPLICATION: Profit from increase of value of the companys circulating assets of $150,000 Dividend can be paid out of current profits even if the company had losses in previous years and the accumulated losses have not yet been extinguished: Ammonia Soda Co Ltd v Chamberlain The ordinary business in JWJ Ltd Company will be the sale of jeans and therefore the exciting stock of jeans will be regarded as circulating assets in the company. Profits available for dividends include profits from the disposal of circulating assets and the increase of value of the companys circulating assets: QBE Insurance Group Ltd v ASC

Revaluation of the premises at Rundle Mall unrealised profit from Revaluation of Fixed asset of $100000 Unrealised gains from revaluation of fixed assets (it is fair to assume that the store at Rundle Mall from which the company conducts its business is a fixed asset) can be distributes as bonus shares: s254S CA (replaceable rule). However, there are diverging authorities as to whether unrealised profits from fixed assets can be used for cash dividends. In a narrow approach such revaluation profits (capital gains) cannot be distributed as cash dividends: Westburn Sugar Refineries Ltd v IRC (1960). A more lenient approach was taken in the Dimbula Valley case where a distribution was allowed subject to the following conditions: The valuation must be made in good faith by competent valuers: here only Wayne and Jane think that the value of the store has increased, this does not comply with the requirement of Dimbula Valley. The board would first have to obtain a valuation by a qualified valuer The revaluated asset must not be susceptible to short-term fluctuations: the store is a long-term and generally not subject to short-term fluctuation, the current economic climate demands caution. The companys constitution allows the distribution of capital profits by way of dividend: we have no indication as to particular provisions in the JWJ constitution. the paid up capital stays intact: Australasian Oil case: based on the facts it cannot be decided whether the paid-up capital would stay intact if the revaluation profit would be paid out as dividend. Considering the uncertainty regarding the actual value of the store, the constitution of JWJ and the preservation of the paid-up capital a prudent approach would not take the revaluation profit into consideration for distribution. CONCLUSION: Only the profit from the increase of value of the companys circulating assets can be paid as dividend as per s254T. Therefore the maximum amount profit available for cash dividend would be $100000 or each share will be entitled to receive a dividend of $1 per share.

4. Grape Crush Pty Ltd(GCPL) is a company specializing in crushing the grapes produced b smaller winemakers in SA that could not afford the machinery to do so. GCPL was established in 006 and has issued 100000 shares at a price of $100 each; however, the share holders have only paid 60% of the price. Celine and Damien each own 35% of the shares. While the remaining shares belong to Aaron and Bert. On 1 January 2010, the GCPL founding shareholder Aaron has signed a contract selling his 10000 GCPL shares to Penfolds Ltd. Although Aaron signed the necessary transfer instrument, the GCPL board of directors has not yet responded to penfolds written request dated 15 January 010 to register Penfolds as the new shareholder of Aarons shares. Rumor had it that the GCPL dislikes the idea that one of the bog wine producers takes a significant stake in GDPL. Bert is also a founding member of GCPL. He sold his 20000 GCPL shares on 31 January 2010 to Mystery holding Pty Ltd, a company that holds assets and shares in various company and industries. The GCPL board registered mystery holding as shareholder of 20000 GCOL shares on 5 February 2010. However, due to a dwindling demand for grape juice the services of GCPL are not as sought after as they used to be and by the end of February 2010 GCPL desperately needs cash. The board decides to ask their shareholders for payment of the uncalled capital. Celine and Damien each paid $1.4 million to GCPL. Unfortunately, Mystery holding still becomes insolvent and goes into liquidation with little chance for the unsecured creditors to recover any money. Advice GCPL whether and from whom they can recover more of the uncalled capital?

ISSUE Who are the members (shareholders) of the company and form whom company can recover the uncalled capital. RULE(S): Only members are liable to pay calls on partly paide shares: CA s113 A person can become a member by accepting a transfer of shares from a present member: CA s231(3) Rule in Trevor v Whitworth (1887) Directors have the discretion t refuse to register a transfer for any reason: CA s1217G APPLICATION: Whether Penfold is a member of GDPL A person can become a member by accepting a transfer of shares from a present member: CA s231(3) Shares are presumed to be freely transferable, subject to the constitution: s10170A(1). Here we are not given the companys constitution. We will just assume the companys

constitution allows that. However s1072F CA gives directors in proprietary companies the discretion to refuse to register a transfer for any reason. In the case the companys shares are initially held by only 4 shareholders, namely Celine, Damien, Aaron and Bert. Therefore we assume that company is a proprietary company and thus the board of directors has the right to refuse the transfer. As implied that the GCPL board of directors has not yet responded to the share transfer and furthermore, there is rumours showing that GCPL board dislikes the idea of transferring shares to the bog wine producer. Moreover, s1072F CA requires several steps to complete the transaction and one of those is the registration of the transferee in the share register. Based on the fact that GCPL has not registered Penfold as a member yet, the transaction is not valid at this stage. Overall it could be infered that the GCPL have not approved the share transfer and therefore Aaron remains as being a shareholder of 20000 shares in GCPL.

Issue Re Mystery holding Pty Ltd 20000 shares Again A person can become a member by accepting a transfer of shares from a present member: CA s231(3). Mystery holding Pty Ltd is registered shareholder of GCPL after several essential steps involved in the share transaction which is also approved by the board of GCPL. Therefore Bert is no longer a member of GCPL.

CONCLUSION: As per CA s113, only members are liable to pay calls on partly paid shares. Given Celine and Damien each paid $1.4 million to GCPL. There is only Mystery Ltd. Very unfortunately given Mystery still becomes insolvent and goes into liquidation with little chance for the unsecured creditors to recover any money. However, the rule in Trevor v Whitworth (1987) claimed that a company is generally prohibited from reducing its issued share capital (100000shares x $100/each) because this would diminish the pool of funds available to pay its debts and therefore prejudice the rights of the creditors. In order to keep the capital intact, I suggest the company to recover the uncalled capital from its existing members to make sure that the shareholders interest as a whole has been protected.