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2020 Exam Questions

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Corporate law (LLH305)

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Queensland University of Technology

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Online Examination Paper

SEMESTER: SECOND SEMESTER EXAMINATIONS 20 20

UNIT: LLH305 CORPORATE LAW – ONLINE EXAM

DURATION OF EXAMINATION: 24 HOURS

INSTRUCTIONS TO STUDENTS:

ALL THREE (3) ARE TO BE ATTEMPTED

MARKS FOR EACH QUESTION ARE AS INDICATED

QUESTION 1

You must answer all parts (a), (b) and (c).

Brothers, Harry, Barry and Dezi Old, run a soft-drink manufacturing business in Toowoomba. Each has considerable individual wealth. They are the sole members of the board of Cool Drinks Ltd ( ‘ Cool Drinks’), an unlisted public company registered on 2 July 1998. Neither Harry, Barry or Dezi are officially registered with ASIC as directors of Cool Drinks. According to ASIC’s records, the directors of the company are Axel, Hazel and Ethel Old, all of whom are deceased. Harry and Barry each hold 40% of the issued share capital (ordinary shares) in Cool Drinks. Dezi holds no shares. Dezi has been seriously ill over a prolonged period but has continued to manage the business.

The company began as a family owned and run business. In order to raise new capital, the company engaged in a massive fundraising campaign in 2018. That fundraising was successful in that it raised a large amount of much needed capital at the time, but the 2000 new shareholders holding the remaining 20% of shares in the company have proved to be a bit of a pain with all their constant meddling and demand for information from the board. The board wishes they had never moved away from being a family owned company. All shareholders in Cool Drinks hold ordinary shares; the company does not have a constitution; all replaceable rules in the Corporations Act 2001 (Cth) apply. Cool Drinks has 200 employees.

Cool Drinks has a history of ongoing financial problems, many of which it has been able to keep under control through fundraising and tweaks to its business model. In 2016 it put in place a system where customers placed standing orders for monthly deliveries, with a deposit payable upfront. The company has never declared a dividend, and as a result has a lot of unhappy shareholders unable to find a willing buyer for their shares. Cool Drinks has been in severe financial distress since the beginning of 2019 but has kept itself afloat on the cash flow from external finance and customer deposits for standing orders placed with Cool Drinks.

The Board decided that the best way out of its financial distress was to find new markets, rid itself of unhappy shareholders and restructure its share capital by:

Question 1 continued overleaf

Question 1 continued By 2 October, all 2000 non-family ordinary shareholders had accepted the buy-back for the totality of their shareholding. This meant that the only shareholders remaining in the company were Harry and Barry. Neither was interested in buying further shares in the company. Cool Drinks paid for the buy-back from issued share capital, leaving Cool Drinks in a financial disaster.

The expansion was going badly. Cool Drinks had done no market research; it turned out that double sarsaparilla is deeply misunderstood in New South Wales. Not a single buyer could be found that was prepared to stock Cool Drinks’ Double Sars ice blocks. Cool Drinks proved to be out of its depth with this radical change to its business model. Cool Drinks hadn’t anticipated how difficult it would be to obtain a licence to manufacture alcoholic products nor how few of its Queensland stockists had a licence to sell alcoholic products. Harry, Barry and Dezi were stunned by these developments and met for a cool drink. Barry said, ‘Fingers crossed we are still solvent’. Harry said: ‘I really hope so’. ‘Me too’, said Dezi.

The Board approached Sunshine Bank for more funds. The bank refused and lodged a winding up application with the court. A liquidator was appointed. The liquidator determined that the company was insolvent at the time of the AGM and that this should have been abundantly clear to anyone who had read the auditor’s report.

You are to provide the following advice.

(a) Are Harry, Barry and Dezi directors of Cool Drinks? (2 marks)

(b) What are ASIC’s prospects of success in an action against Harry, Barry and Dezi under ss 259A, 259F and 588G? (16 marks)

(c) The entirety of Sunshine Bank’s loan is unpaid. Does the bank have the right under the Corporations Act 2001 (Cth) to recover the unpaid amount as a debt due from Harry, Barry or Dezi? (2 marks) Question 1 continued overleaf

Question 1 continued Do not discuss any other duty (either under Corporations Act 2001 (Cth), ss 180-183 or at general law) that may have been breached by Harry, Barry or Dezi. In formulating your advice, you may assume that neither of the insolvent trading safe-harbour provisions in ss 588GA nor 588GAAA apply. [TOTAL 20 marks]

Question 2 continued (b) Assume that Sweet Delights has been unable to avoid liquidation and a liquidator was appointed to Sweet Delights on 30 October 2020.

The liquidator conducted a search of the Personal Property Securities Register on the date of her appointment. That search revealed the following perfected security interests:

Big Bank Ltd has an all present and after acquired property security interest dated 1 July 2015 pursuant to a loan agreement dated 30 June 2015 for a loan facility amounting to $500,000 that was advanced on 2 July 2015. The loan agreement provides Big Bank Ltd with the right to appoint a receiver in the event of a default of payment under the terms of the loan; and
Dixie Sugar Ltd (‘Dixie’) has a purchase money security interest (PMSI) dated 15 August 2016 over all sugar supplied to Sweet Delights pursuant to a conditional sale agreement dated 12 August 2016. Dixie’s first supply of sugar to Sweet Delights occurred on 16 August 2016.

Dixie has written to the liquidator demanding the return of its goods.

The liquidator has spoken to Big Bank Ltd who has confirmed that it is currently owed $400,000 under its loan facility with Sweet Delights and that Sweet Delights is 4 months behind in its loan repayments.

You are to provide the following advice:

Advise the liquidator of Dixie’s rights in relation to recovering the sugar supplied to Sweet Delights and Big Bank Ltd’s rights in relation to recovering monies owed to it by Sweet Delights. (5 marks) [TOTAL 10 marks]

QUESTION 3

You must answer all parts (a), (b) and (c).

Zoom Groom Pets Ltd (‘Zoom Groom’) is an unlisted public company formed in 2018 that is in the business of grooming pets for online appearances. The company’s directors are Darryl, Jennifer and Stephen. Darryl is a managing director of Zoom Groom and holds 30% of the issued share capital in the company. Jennifer holds 30% of the issued share capital and Stephen holds 20% of the issued share capital. The remaining 20% of the shares are widely held.

On 21 August 2020, Darryl took up the position of director with Dynamic Clippers Ltd (‘DC’), a company which manufactures pet grooming equipment. In conjunction with that role, Darryl acquired 10% of ordinary shares in DC.

The board of directors of Zoom Groom are all good friends and socialise frequently. At these social occasions, Darryl regularly discussed his role with DC. However, Darryl did not make any formal disclosure of his appointment with DC to the board of Zoom Groom, and no minutes were recorded of that appointment.

Zoom Groom’s pet grooming business boomed in 2020 and in September 2020, the board of directors had begun to discuss the viability of expanding the business to include the manufacture of pet grooming equipment. In particular, Zoom Groom wanted to manufacture a self-sharpening all in one dog clipper (‘the clipping tool’) that Darryl had designed. The business expansion was discussed at length during a board meeting held on 10 September 2020. However, the board of Zoom Groom ultimately determined that the cost of investing in a manufacturing line was excessive and not in the company’s best interests.

At that same meeting Darryl suggested that he could convince DC to develop the clipping tool and then sell to Zoom Groom at a discounted price. Zoom Groom could then both use the clipping tool in its grooming business and sell the tool to retail customers at a significant profit. The board discussed that option, indicating that it might be a good opportunity, but no formal decision was made.

Question 3 continued overleaf

LLH305T4.

Question 3 continued The board refuses to bring proceedings against Darryl because it believes: there is nothing for Zoom to gain in bringing the proceedings; Zoom has suffered no loss. It stands to increase its profitability because of the Sales Agreement. Zoom is not a big company and doesn’t have the resources to devote to supporting the litigation without seriously compromising its capacity to run its business.

You are to provide the following advice:

(a) Rhonda believes Darryl has contravened ss 182 and 183. You may assume this is correct. Is Rhonda likely to succeed in seeking leave to bring proceedings against Darryl under Part 2F (ss 236-242) of the Corporations Act 2001 (Cth)? (10 marks)

(b) Has Darryl contravened ss 191 and 195 of the Corporations Act 2001 (Cth)? You do not need to address the penalties that might apply to a contravention of these sections. (10 marks) [TOTAL 20 marks]

END OF PAPER

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