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TABL2741

| Business Entities

Weeks 12 & 13 Class Discussion Notes

Week 12
In 2013, three friends (Amy, Lee and Chu) incorporate Bold Fresh Pty Ltd to operate a retail fashion
shop that specialized in selling the latest trendy fashion designs. Amy and Lee each held 45% of the
issued shares in the company and Chu held the remaining 10% of the shares. The companys
constitution stated that all three were directors of the company, with Amy being appointed as the
managing director.
Chu is very critical of Amys management but lacks the support of Lee in confronting Amy about her
style of management. Lee informs Amy about the Chus dissatisfaction. To teach Chu a lesson, Amy
and Lee decide to incorporate a new company called Bolder and Fresher Pty Ltd in which Amy and
Lee are equal shareholders. Bolder and Fresher Pty Ltd trades in the neighboring suburb and Amy
and Lee divide their time between the two businesses.
Chu is incensed when he hears about these developments but is unsure what he can do as he feels
that he has been outsmarted by his friends.
Advise Bold Fresh Pty Ltd, the directors of that company and Chu of their rights and liabilities with
reference to the Corporations Act and relevant precedents.
Relevant Case Law:
Cook v Deeks

Facts: TCC was formed to execute a tender for construction of railway line for CPR. When
contract successfully completed CPR commenced negotiations with 2 directors of TCC, Deeks
and H, for construction of another line. Deeks, his brother and H together held 3/4 of capital
in TCC with remainder held by Cook. Those 4 people were the only directors of TCC. Cooks
fellow directors decided to exclude him from any new contract, so they formed a new
company, DCC, in which Cook had no interest. DCC then carried out the new contract. A
general meeting of TCC was held at which Deeks, his brother and H used their voting power
to approve sale of part of companys plant to DCC and to declare that TCC had no interest in
new contract.

Cook brought proceedings against other directors and DCC claiming they held contract for
benefit of TCC.

Held (Lord Buckmaster LC): the directors obtained the new contract in the course of their
role as directors of TCC, and therefore that contract rightfully belongs to TCC under the duty
not to make secret profits. They cannot ignore their fiduciary duties and divert new business
for their own purposes.

An attempt by the three directors (who constitute a majority of the TCC) to give up the new
contract or ratify their own actions amounts to forfeiting the interests and property of the
minority of shareholders in favour of the majority, which is not allowed the general
meeting cannot make resolutions to oppress the minority


Disclaimer: This document is not and does not purport to be a formal set of solutions or a solutions guide to
the tutorial problems. Everything above is purely a documentation of class collaborations discussed in class. No
responsibility is taken for reliance on this document. 2015 Nathan Huynh All Rights Reserved

TABL2741 | Business Entities

Weeks 12 & 13 Class Discussion Notes

Is there a breach of duty?


Assume Boulder is in a similar line of business and is competing with Bold and Fresh
Breach of no conflict rule (s 182) and good faith obligations (s 181)

Shareholder Derivative Action compensation paid to the company



Probable that company wont initiate litigation
o Likely majority shareholders wont bring an action against themselves
Applicant is acting in good faith
o Does not appear to be a collateral purpose for Chu to bring action
o Appears reasonable to assume a good cause of action exists
In companys best interests for leave to be granted
o Doesnt appear to be any other options to stop the directors from closing the other
company
o Practical need to have directors wholly committed and not directing business
Serious Question to be tried
o Doesnt need to show can win, just need to show they sufficient likelihood of
success
Company has been notified 14 days in advance
o Easily established

Minority Oppression

Likely that directors will try and vote to ratify disclosure of their conflict
Conduct of companys affairs, actual/proposed act or omission, resolution or proposed
resolution
Note, see Cook v Deeks


Winding up extreme, not likely in this case
Statutory Injunction possible

Any person whos interests have been impacted


Injunction or damages








Disclaimer: This document is not and does not purport to be a formal set of solutions or a solutions guide to
the tutorial problems. Everything above is purely a documentation of class collaborations discussed in class. No
responsibility is taken for reliance on this document. 2015 Nathan Huynh All Rights Reserved

TABL2741 | Business Entities

Weeks 12 & 13 Class Discussion Notes

Week 12
Ben, Mary and Liang are the company directors in QuickCo Pty Ltd (QuickCo), having founded the
company several years ago. Lately, QuickCo has been experiencing unusual cash flow problems and
may not be able to pay all of it's creditors their full entitlements. This is the first time in the
company's history that the business' cash flow has not been sufficient to cover all liabilities. The
directors of QuickCo believe that the company's position will improve as they are currently
negotiating several large contracts that would hopefully bring in sufficient cash flow to satisfy all
present liabilities. Ben, Mary and Liang are concerned about their future job prospects if the
company becomes insolvent.
CreditCo Pty Ltd (CreditCo) is a secured creditor of QuickCo with a 1st registered mortgage over
QuickCo's office building (its most significant asset). CreditCo is concerned because QuickCo has not
made its monthly loan repayments over the last 2 months. CreditCo is concerned about obtaining
repayment of the debt, but does not want to pressure QuickCo as the company is its largest business
customer. If QuickCo goes out of business, CreditCo will loose a substantial portion of its business.
CreditCo is flexible about obtaining repayment of its debt.
Ezifinance Pty Ltd (Ezifinance) is an unsecured creditor of QuickCo who also has not been paid for
the last 2 months and is concerned about the repayment of its debt by QuickCo. QuickCo is
Ezifinance's smallest client and the CEO of Ezifinance would like to clear the debt off the company's
books sooner rather than later.
Advise each of the following parties with reasons, and with reference to the relevant sections of the
Corporations Act, as to which form of external administration would best suit their needs.
. (a) Ben, Mary and Liang
Volunteer Administration

Maximise chance of company continuing existence


Temporary safety zone from creditors
Administrator will take control for 4-6 weeks, investigate company affairs, recommendations
to creditors on courses of action
At the end hope administration ends, or enter into a Deed of Company Arrangement to
rescue the company

. (b) CreditCo; and


Receivership (s 420)

Company remains alive, and the company keeps trading


Receiver can take possession/control of the property
o Convert property into money
Mortgage
Lease/Buyback
I.e minimizes business interruption, whilst still gets the money back



Disclaimer: This document is not and does not purport to be a formal set of solutions or a solutions guide to
the tutorial problems. Everything above is purely a documentation of class collaborations discussed in class. No
responsibility is taken for reliance on this document. 2015 Nathan Huynh All Rights Reserved

TABL2741 | Business Entities

Weeks 12 & 13 Class Discussion Notes

. (c) Ezifinance
Issue a statutory demand (s 459C(2))

Statutory demand must be served on the company


Will have 21 days to challenge on the following grounds:
o Major defect causing substantial injustice (s 459J)
o Genuine dispute about existence or amount of debt (s 459H)

Ezifinance will then have to either pay the debt or risk compulsory winding up
This way Exifinance will get its money ASAP
Your answer should also consider whether the party you are advising is able to initiate the form of
external administration you are advocating.


















Disclaimer: This document is not and does not purport to be a formal set of solutions or a solutions guide to
the tutorial problems. Everything above is purely a documentation of class collaborations discussed in class. No
responsibility is taken for reliance on this document. 2015 Nathan Huynh All Rights Reserved

TABL2741 | Business Entities

Weeks 12 & 13 Class Discussion Notes

Revision Rubric
Types of Business Entities:

Sole Trader
Partnership
o Carrying On
o In Common
o With View to Profit
Joint Venture
o Everything separate, focus on product/not profit
Trust
o Express Trust declaration of settlor
Discretionary
Fixed
o Non-express trusts
Implied
Constructive
Companies
o Propriety Company
Small
Large
o Public Company

Separate Legal Personality

Body corporate
Limited Liability
Corporate Veil
o Barrier between company and members
o Can be pierced or lifted if improper purpose
Corporate Groups
o Agency relationship


Constitution/Replaceable Rules

Incorporation
Contractual liabilities
Tort and Criminal Liability
o Organic theory is the mind and will attributable to the company?
o If not vicarious liability


Promoters/Corporate Fundraising

Promoters
o Fiduciary duties
o Disclosure of interests

Disclaimer: This document is not and does not purport to be a formal set of solutions or a solutions guide to
the tutorial problems. Everything above is purely a documentation of class collaborations discussed in class. No
responsibility is taken for reliance on this document. 2015 Nathan Huynh All Rights Reserved

TABL2741 | Business Entities

Weeks 12 & 13 Class Discussion Notes

Corporate fundraising
o Prospectus, profile statement, information sheet
o
o Protection of investors
o Statutory defence
Lack of consent, knowledge, reasonable reliance
Objective/Subjective


Share Capital

Why issue shares


Main types/classes
o Ordinary
o Preference shares


Directors Duties:

General law:

Act in good faith and in the interest of the company


Use powers for a proper purpose
Avoid conflicts actual and potential
Keep discretions unfettered
Exercise due care and diligence
Duty of care and skill comes from equity and tort of negligence

Statutory duty

Due care and diligence


o Business judgment rule
o Reliance
o Responsibility for actions of delegates
Good faith
Proper purpose
Improper use of position
Improper use of information
Prevent insolvent trading
o Defences: reasonable to expect insolvent, delegation, absent for good reason, took
all reasonable steps to prevent the company from incurring the debt
Duties co-exist with common law duties

Remedies:

Damages or compensation
Accounts of Profit
Recission of contract
Return of property and constructive trust

Disclaimer: This document is not and does not purport to be a formal set of solutions or a solutions guide to
the tutorial problems. Everything above is purely a documentation of class collaborations discussed in class. No
responsibility is taken for reliance on this document. 2015 Nathan Huynh All Rights Reserved

TABL2741 | Business Entities

Weeks 12 & 13 Class Discussion Notes

Statutory civil penalties

Pecuniary orders
Disqualification order
Compensation order


Relief by Court
Relief by shareholder
Shareholder Remedies

Common Law
Shareholder Oppression
Statutory Derivative Action
Winding up
Statutory Injunction

Disclaimer: This document is not and does not purport to be a formal set of solutions or a solutions guide to
the tutorial problems. Everything above is purely a documentation of class collaborations discussed in class. No
responsibility is taken for reliance on this document. 2015 Nathan Huynh All Rights Reserved