Question A (10 marks)

STEEL TANKS LTD

About ten years ago Rick Smith established an unincorporated business trading under the name ‘Rick’s Tanks’. The business manufactures and installs rainwater tanks.  The tanks are made of high quality zincalume steel at a purpose built factory which is located on industrial land that Rick owns in the Perth suburb of Two Rocks. The tanks can be used in a wide variety of applications. They have, in recent years, secured a strong market share in Western Australia and Rick believes that the business is now well placed to expand into the lucrative and fast growing Middle Eastern and African markets. But Rick is no longer a young man. He lacks the appetite for all the hard work and all the travelling that would be necessary in order to establish the business in those markets. He is starting to think about retirement. As a result, in January last year, Rick decided that he would gradually hand over control of the business to his employees.  To that end, he decided to incorporate a company, in which his employees could purchase shares, and to which he could sell the business. Rick employed the services of Dave, an accountant, to set up the company, which was to be named “Steel Tanks Ltd”. In accordance with Rick’s instructions Steel Tanks Ltd was duly incorporated. Its constitution is a combination of the replaceable rules plus the following additional provisions:

“Clause 1

The sole object of the company is to manufacture and sell rainwater tanks in Australia, the Middle East and Africa.

Clause 2

Rick Smith shall be and shall remain a director of the company and Chairman of the Board of Directors for as long as he so desires. No attempt to alter this clause or to dismiss Rick Smith as a director will be legally effective without his written consent.

Clause 3

Rick Smith shall be and shall remain an employee of the company (in the capacity of Technical Consultant) until 31 December 2017 at a salary of $120,000 per annum.

In the application for registration that was lodged with ASIC, four loyal and long serving employees of Rick’s Tanks: Bob, Dick, Carol and Jeff, were listed as the initial shareholders of Steel Tanks Ltd. No shares were allotted to Rick. But Rick was listed as one of the company’s directors along with Bob and Dick. Dick was also listed as Company Secretary.

On 31 January last year, just a few days prior to the actual incorporation of Steel Tanks Ltd, Rick signed a contract pursuant to which he agreed to sell and Steel Tanks Ltd agreed to purchase Rick’s Tanks (“the business”), including the associated goodwill, all contracts on hand and the land and factory premises at Two Rocks. The agreed total purchase price was $500,000. Funding for this purchase was provided to the company from the personal savings of each of its four shareholders.  The contract of sale was signed by Rick as vendor and by Bob in his (purported) capacity as Managing Director of the purchaser company, Steel Tanks Ltd. As soon as Steel Tanks Ltd was actually incorporated the Board of Directors resolved to ratify and approve this contract. However, when they did so, the Board (collectively) was unaware that, only a few months before the contract was executed the business and the land together had been independently valued in writing as worth no more than $350,000. Of course Rick (as an individual) was well aware of the existence of this valuation, but he was convinced that it was inaccurate, so he decided to conceal it from his fellow directors.

On the basis of the above facts (and of the further facts given in each of the questions below) answer all of the following questions giving full reasons for your answers and referring where necessary to relevant cases and statutory provisions.

[NB: In answering these question please restrict yourself to discussing only those legal principles that were covered in Lectures 1-12, (and associated notes, slides and handouts). No marks will be awarded for discussion of other issues or principles.]

Questions:

(i) Carol suspects that the purchase price that Steel Tanks Ltd paid for the business and land was well in excess of their true value. She has previously asked the Board to take legal action against Rick for recovery of the overpayment, but the Board members all said they were happy with the deal and thought it was not in the company’s best interests to pursue the matter further. Carol was furious, but felt she could not do anything to rectify this ‘gross injustice’. However, as luck would have it, the company recently held an extraordinary general meeting in the course of which all the original directors (except Rick) were removed and new (independent) directors were appointed. Carol has now renewed her request to the Board that they cause the company to take legal action against Rick.

Advise Rick as to whether, if the company decided to sue him to recover the alleged overpayment, its action would be likely to be successful. (2 marks)

ii) At Carol’s request, an Extraordinary General Meeting (EGM) of the shareholders of Steel Tanks Ltd was recently held at which (among other things) two motions were passed unanimously – one was a motion deleting Clause 2 from Steel Tanks’ constitution, and the other a motion dismissing Rick from his directorship. Rick was not informed of this meeting or of the resolutions that were to be put to the meeting.  On the same day, and immediately after the EGM had concluded, the remaining directors of Steel Tanks held a Board meeting (again without giving any notice to Rick) at which they resolved to dismiss Rick from his post as Technical Consultant to the company.

Advise Rick as to the validity of his dismissal as (a) Director and (b) Technical Consultant and as to whether he could successfully claim any compensation for either or both dismissals. (2 marks)

(iii) Some time ago (when Rick, Bob and Dick were still the directors of Steel Tanks) Steel Tanks tendered for a contract to supply ten large rainwater tanks to a farm in the Shire of Wagin, approximately 225km south-east of Perth. Unfortunately Steel Tanks did not get the job. Steel Tanks later learned that they had lost out, by a very small price differential, to a previously unheard of competitor, Metro Tanks Pty Ltd. On checking the ASIC database, Steel Tanks discovered that Dick was the sole shareholder and director of Metro Tanks Pty Ltd. The new Board of Steel Tanks is strongly of the view that, by causing and allowing Metro Tanks Pty Ltd to bid for this contract in competition with Steel Tanks, Dick breached the director’s fiduciary and statutory duties he owed to Steel Tanks and that, as a result, he is legally liable to pay compensation to Steel Tanks for the loss of profits that it suffered as a result of Metro Tanks ‘theft’ of this contract. But the Board is unsure as to whether Steel Tanks is able to also sue Metro Tanks for recoverery this money, or whether it can only make a claim against Dick personally.

On the basis of the above facts advise the Board as to whom Steel Tanks can sue. (You don’t need to provide any advice as whether Steel Tanks is likely to be successful in any such action or actions.) (2 marks)

(iv) Steel Tanks Ltd was recently informed by a geologist that its factory building at Two Rocks is situated on a huge gold deposit. On the basis of this advice the Board of Steel Tanks meets and decides to vacate its Two Rocks land and move its water tank making business to another location. It also decides to incorporate a subsidiary company to purchase the Two Rocks land and conduct gold mining activities on that land. To that end, Bob sets up a proprietary company called ‘El Dorado Pty Ltd’ to purchase the land at Two Rocks from Steel Tanks.

El Dorado has three shareholders, Bob (1 share), Carol (1 share) and Steel Tanks (100,000 shares). The 100,000 shares were issued to Steel Tanks in full and final payment for its land at Two Rocks. On the other hand, Bob and Carol have so far only paid $1 per share for each of their $5 shares. Bob and Jeff are appointed directors of El Dorado. Unfortunately, after further detailed investigation, it turns out that the geologist’s original advice was wrong and that the land in Two Rocks does not contain any gold.

Advise all of the abovementioned parties (except the geologist) as to what (if any) liabilities would attach to them under the Corporations Act 2001 (Cth) in the event that El Dorado is subsequently found to be insolvent and is wound up with debts owing. (2 marks)

(v) Jeff wishes to sell his shares in Steel Tanks to his wife, Jane. Jane works as a teacher in a primary school. However the Board of Steel Tanks refuses to register the transfer as they feel that membership should be restricted to employees of the company.

Advise Jane as to whether she can take any action to compel the company to register the share transfer in her name. (2 marks)

Question B (20 marks)

FINE HOMES PTY LTD

Roger and Gerald are the only directors of Fine Homes Pty Ltd. Together they hold 60 of the 100 issued shares in the company. William holds the remaining 40 shares. William has received a very attractive offer to purchase his shares from Homes-R-Us Pty Ltd. Homes-R-Us Pty Ltd is a major competitor of Fine Homes Pty Ltd. In order to prevent Homes-R-Us from obtaining a substantial shareholding in Fine Homes Pty Ltd, Roger and Gerald issue 100 shares to Joe.  Joe is an old school friend of both Roger and Gerald. When Homes-R-Us learns of this new share issue to Joe it immediately withdraws its offer to purchase William’s shares.

Shortly after this, Fine Homes Pty Ltd is offered a lucrative contract by Futuristic Homes Pty Ltd to design and build nuclear fallout shelters.  This offer is made to Fine Homes Pty Ltd primarily because of Roger’s established reputation as an applied nuclear physicist.

The Board of Directors of Fine Homes Pty Ltd meets to consider the offer but Gerald (who is very jealous of Roger’s high public profile and reputation) argues that Fine Homes Pty Ltd has sufficient work on hand at present and that it would be unwise for the company to over commit itself.

Eventually, after much debate, the Board decides to defer a decision on the Futuristic Homes contract. Roger is very disappointed with this decision. He remains in contact with Futuristic Homes and eventually manages to secure the contract for his own ‘one person company’.

Roger’s company successfully carries out the contract work to both design and build the shelters for Futuristic Homes Pty Ltd. It eventually makes a profit of $1 million from this contract.

On the basis of the above facts, have either or both of the directors of Fine Homes Pty Ltd breached their statutory or general law duties to that company and, if they have, what remedies is the company entitled to seek from them?

[NB: In answering this question please restrict yourself to discussing only those legal principles that were covered in Lectures 1-12, (and associated notes, slides and handouts). No marks will be awarded for discussion of other issues or principles.]

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