BULAW5915 Corporate Law
1. Aman, Brian, Chris, Amena, and Sylvia were members of the board of directors of peninsula clothing ltd (PCPL), a company engaged in the business of importing and supplying cashmere as wholesalers to the local market. Aman was also the managing director. The board decided PCPL needed to become more competitive by increasing the volume of its sales through lowering prices. PCPL obtained a loan of $4 million dollars from Loans Plus Ltd. The loan was secured by a floating charge over the assets of PCPL. $3 million was used to buy more stock and $1 to buy a large new warehouse and showroom from Show Rooms Pty Ltd. Chris was not at the director’s meeting when these decisions were made as he was in hospital. Sylvia, as was her usual custom, had not been at the meeting but had signed the necessary documentation acknowledging her agreement to expand the business and to get the loan. Amena chose not to vote at the meeting. She had said she did not know if she agreed with the decisions. Aman and Brian voted to go ahead with the expansion of the business and the loan. At about this time, Brian established contact with Lee, who was a retailer of clothing made from cashmere. Lee was looking for reliable suppliers but said he would not deal with PPCPL as he did not like Aman. Brian did not wish to miss a good business opportunity and arranged to set up his own business as a wholesaler of cashmere. Brian entered a contract with Lee to supply cashmere to Lee.
Required:
- Discuss whether each of Aman, Brian, Chris, Amena, or Sylvia has breached any of their directors’ duties. You should support your answer with reference to relevant sections of the Corporations Act 2001 and to relevant cases.
2. Eagle Aviation Co Ltd (hereinafter, Eagle) is an airline flying from Melbourne to all major destinations in Europe and the United States. Due to growing competition from newly emerged budget airlines, Eagle’s has experienced financial difficulties. When international borders closed due to the COVID-19 pandemic in 2020, Eagle’s situation worsened. Its executive directors lan, Sam, Jemma, and non-executive directors Irene and Pradip wanted to save the company and in doing so, diverted its business from international to domestic flights. To do this, they purchased some small aircraft and borrowed $3 billion from Smart Bank in June of 2020. Unfortunately, in early 2021, with the spread of the pandemic worsening in Australia, Eagle had to suspend its domestic flights having become insolvent.
Required:
- Have the directors of Eagle Aviation Co Ltd breached provisions of the Corporations Act 2001 (Cth) other than sections 181-193? What defenses, if any, may be available to them under these circumstances? (15 marks)
3. Aziz, Sonia, and Scott have been doing business in partnership since they graduated from Charles Darwin University almost five years ago. While their business is growing rapidly they are planning to go even bigger. For this, they need to increase capital and intent to include more investors in their business initiative. Someone has told them that setting up a company might be a better option for their business. Sonia, on behalf of the business, has approached you to learn more about the company as a business entity.
Required:
- Explain the relative advantages of a public company over a partnership with Sonia. Also, advice of any disadvantages they may experience if they convert their partnership into a public company.
4. Enn and John and Wang are directors of Lithium Land Ltd (LLL) a public company excavating and trading mainly lithium. Until the end of 2022, LLL had a total equity capital of $100 million and they borrowed $30 million from Rich Bank to drill for lithium in anew mine they purchased. The drilling commenced in early 2023 and is expected to be finished at the end of December 2024. However, the price of lithium fell by 70% in the las few months, causing almost 70% decline in LLL’s equity capital. The board of directors now apprehensive that the company may run into insolvency soon. They come to you for advice about the company’s options for external administration.
Required:
- Explain the various types of external administration and then advice the one that would be most appropriate to address their circumstances.
5. Wang, Erin, and Navneeta are the directors of Super Cool Café Ltd (SCCL) which is now doing very well. Wang decides that now is a good time to expand the business by opening up new stores. The café was recently featured in the Good Café Guide, and business is booming.
Wang estimates that they will need another $3 million to open up more stores. Erin may be interested in investing another $200,000. Wang decides to put an advertisement in the local Chinese language newspaper.
“New investor needed: greater than 20% returns on investment guaranteed…. Call Wang at 0412345678.”
There is no reasonable basis for this claim, but Wang is optimistic about the business’s future prospects.
Wang decides to register new company, SC Future Pty Ltd (with Wang taking on the sole director role and SCCL owning all the shares in SC Future), and this new company will issue new securities to the public to raise money for the expansion of the SCCL business.
Required:
- Advice Wang whether the advertisement he had made leads to violation of company law. Explain the rules that must be complied with by the SC Future and SCPL in relation to their target fundraising activities.