legal Issues: Commercial law

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Marks will be awarded for:

  1. Identification of the issues raised by the question;
  2. Application of the relevant law, i.e. legislation and cases to the material facts;
  3. Reference to relevant literature and other legal materials;
  4. Coherence and persuasiveness of argument or line of reasoning leading to a conclusion; and
  5. Structure, flow and stylistic competence

Each question should be no more than 750 words long making a total word count for the 2 questions of 1,500 words. The reference list does not count in the word limit.

QUESTION 1

Wealth Ltd (Wealth) is an asset management and consulting company which listed on the ASX (Australian Stock Exchange) five years ago. It has eight directors. Alan, Ben, Chris, David and Elias are non-executive directors, with Alan, David and Elias making up the audit committee. Fred, Gerald and Hal are executive directors, being the chief executive officer, chief financial officer and chief operating officer respectively. The company has around 20,000 shareholders although the precise number changes on a daily basis. Fifteen years ago, Gerald was disqualified from managing companies for eight years for failing to keep adequate accounting records and causing significant losses to the company he directed.

 

Two years ago, Fred, Gerald and Hal set up another company, Boss Enterprises Pty Ltd (Boss), of which they own all the shares and are the only directors. They then caused Wealth to enter into a number of contracts for the supply of services with Boss on terms which are unfavourable to Wealth. They have also been diverting a substantial amount of business from Wealth to Boss. For a while they managed to conceal the losses these actions were causing to Wealth by producing fake accounting figures. While the figures were very obviously fake, the fraud was not discovered by the company’s auditors or the audit committee for a couple of years, but with the appointment of new auditors, the true position has been uncovered.

As a result of this, Wealth’s turnover and profits are down, and its share price has fallen considerably. A number of shareholders have complained to ASIC, which has launched an investigation.

Focusing on duties and remedies found in the Corporations Act 2001 (Cth) and related case law, advise Alan, Ben and Fred as to whether they are at risk of liability or other sanctions.

End of Question 1

QUESTION 2

Flexible Ltd (Flexible) is a public company that sells physiotherapy equipment. There are 50 shareholders (a mix of employee and non-employee shareholders) all with equal shareholdings in the company. Since its registration the 5 founding directors (all validly appointed and registered with ASIC) have continued to direct the company.

 

At a meeting on 2 May 2017 the 5 directors of Flexible decided that changes in the market have reduced the capacity of Flexible to operate long term. As there is no probability of selling the business as a going concern, the directors have determined to wind up the company and, with the unanimous approval of members at a 9 June 2017 meeting, have appointed Cassell to act as liquidator.

 

Cassell agreed to act as liquidator and commenced as liquidator on 10 June 2017.

 

You work for Cassell as a graduate accountant and you have been instructed to write a memorandum advising on the following:

 

  • First whether each claim is a debt that Flexible is required to pay. You MUST explain your reasoning for each item by reference to the Corporations Act 2001 (Cth) and using the issue, rule application and conclusion approach. You must refer to the Corporations Act 2001 (Cth) and case law where relevant.
  • Second, explain and apply the order of priorities in the Corporations Act 2001 (Cth) to determine how much each claimant will receive and how much will be returned to shareholders if anything.

You are advised by the liquidator that Flexible has the following assets:

  • The Warren St building valued at $750,000;
  • Stock in trade that could be sold for $100,000 (this is the actual value that could be realized by a liquidator rather than its potential value if it was sold during normal commercial operations);
  • Cash and ASX listed shares in other companies valued at $500,000.

A number of debts appear on the books and have emerged following Cassell advertising the liquidation:

Stretch – contract dated 1 December 2014

One of Flexible’s major suppliers, Stretch Pty Ltd (Stretch), has a $150,000 loan secured by a document described as a “floating charge/circulating security interest” over the stock and trade of Flexible Pty Ltd”. Flexible’s finance director had approached Stretch for the loan and agreed to the floating charge/circulating security interest. After reaching agreement, the finance director of Flexible signed the documents at Stretch’s office. The chairman of Stretch then put the executed agreement in their office safe and only took it out when they heard a liquidator has been appointed over Flexible.

 

Flexible has not missed a payment to Stretch under this agreement. There is an outstanding debt of $50,000 to Stretch.

 

Ret Lease – 1 February 2017

 

Ret has contacted Cassell claiming they have a lease agreement with Flexible. One of the members of Flexible felt Flexible was not taking up expansion opportunities and signed a lease with Ret when they noticed the opportunities presented by this building.

 

The Ret lease agreement was entered into by David, a shareholder of Flexible. David is not an officer of Flexible but has the intention of joining the board of turning Flexible into a partnership at the next annual general meeting of Flexible. Anticipating his success, David signed the documents as “David James, partner of Flexible Ltd”.

 

Ret thought Flexible was a partnership based upon representations made by David.

As there is no record of the Ret lease or David’s activities in Flexible’s computer files or company records Cassell asked the directors for further information. All directors indicated they had not heard of the Ret lease or David’s plans or representations.

PI Queensland Supreme Court judgment – 25 May 2017

Flexible was found to be vicariously liable for personal injuries experienced by Smith. The court issued a final judgment that Flexible was required to pay Smith $250,000 in damages.

Employee entitlements – 10 June 2017

Flexible’s employees’ wages were not paid on time and there is $150,000 owed on employees’ wages, $14,000 on unpaid superannuation entitlements and $50,000 in outstanding annual leave and other entitlements.

Liquidation expenses – 10 June 2017

There is an account from Cassell for liquidation expenses of $15,000. Cassell has agreed to perform the liquidation for a fixed fee and no further liquidation expenses are anticipated.

End of Question 2

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