CORPORATE LAW Questions: Use IRAC approach!
- QUESTION 1-What is the standard of care expected of a company director? (give a case as authority for your answer)
- QUESTION 2-What happens if a person to whom a director has delegated responsibilities does not take reasonable care, skill or diligence in fulfilling those responsibilities?
- QUESTION 3-To what extent is it reasonable for a director to rely on information provided by others?
- QUESTION 4-What is the business judgment rule?
- QUESTION 5-What are the elements of the duty to prevent insolvent trading?
- QUESTION 6-What defences are available for breach of the duty to prevent insolvent trading?
- QUESTION 7- (Seminar Problem) Alex, Mary and Jacob establish a company in which they each take shares. Alex has another job as an accountant and so he contributes most of the money to the new company and receives 60% of the shares in the company. Alex is quite busy with his accountancy practice and so he chooses not to become a director of the company.
- Mary and Jacob plan to run the business themselves and each takes a 20%shareholding and also act as officially appointed directors. However, Jacob forgets to submit a written acceptance of this role as a director. During the first year the company runs very well with Mary acting as CEO and Jacob as company secretary. However, given that Alex owns a majority of the shares in the company, he is consulted about any significant decisions by mary and Jacob. If Alex disagrees with the course of action proposed by Mary and Jacob, then normally they will compromise to suit Alex. One day while Alex is inspecting the company’s accounts (which he regularly does) he notices some accounting anomalies which suggest that Mary has been misappropriating funds from the company. Furthermore, Alex believes that the company has been insolvent for some time.
- QUESTION 7 PART A) Does Alex fit within the definition of an officer under the Corporations Act?
- QUESTION 7 PART B) Can Jacob avoid liability as a director by arguing that he was not officially appointed (due to the fact that he did not accept his position in writing)?
- QUESTION 8- Fred was appointed as managing director of a wind-turbine manufacturing company (WTM Ltd) in February 2011. It owns a factory that makes wind turbines. Fred is in day-to-day control of the company. During the time Fred is managing director, the Board of Directors comprises:
Fred, who is an engineer and experienced manager.
Gerald, Fred’s stay-at-home partner. Gerald seldom comes to meetings because he is too busy cleaning their house. He did not go to any meetings in 2011.
Harriet, a well-qualified accountant.
Ian, a hairdresser who runs a successful chain of hair salons and who sits on several large public company boards.
The board’s function in WTM is to set the policies of the company for Fred to carry out and to approve major transactions
At the time of Fred’s appointment WTM was in a strong financial position. But by August 2011 it is insolvent. A liquidator is appointed. On investigation, the following matters are discovered.
1-WTM purchased a new yacht worth $10 million in March. The yacht has experimental sails. These sails prove to be inefficient and the yacht needs a $1 million refit with normal sails. As it is, it is only worth $1 million and even after refitting it would be worth only $5 million.
2-In August 2011 WTM has loaned $1 million to a company which has now gone into liquidation. The company was well known to be in trouble and perusal of its last set of accountant would have revealed significant cash-flow problems. The Board of WTM had approved the loan.
Advise the liquidator whether any of the directors has breached their duties of care and diligence.