Commercial and Corporate Law Research Paper Bill and Simon were the executive directors of an unlisted public company called First Class Racing Ltd. Philip, Helen, and Robin were the non-executive directors of the company.

Philip was also the chairman. The company is involved in the development of an online betting system which they hoped to sell globally.

Commercial and Corporate Law Research Paper

The company had initial funds from investors of $12m and 100 shareholders. The funds were raised specifically to develop the online betting system.

In May 2014 when Philip and Helen were away on holidays, Bill, Simon, and Robin called a board meeting and passed the following resolution. The quorum required for board meetings was 2 directors. The resolutions passed were:

1. To buy a racehorse for up to $5m
2. To award the development of the software contract to a company called ITZW Pty Ltd at a cost of $502,078

When Philip and Helen returned from holidays they found out about these two transactions. Further investigation by them showed that the horse was owned by Billís father in law who was forced to sell because of his impending divorce. Bill did not disclose this to the other three directors. Bill, Simon, and Robin did not get a valuation of the horse nor get it checked by a vet. Unfortunately, the horse got stung by a bee and developed an infection and later died.

The contract to ITZW Pty Ltd was proposed by Simon as his brother ran the company and was in need of work. The other two directors Bill and Robin did not ask questions and approved the contract.

Required

Philip and Helen on their return find out about all three transactions. Advise them as to whether Bill, Simon, and Robin have breached their duties to the company

Question 2 (15 Marks)

John Pty Ltd, which imports garments from overseas, has three directors, John, his wife Grace and his mother-in-law Maria. Both John and Grace are actively involved in the running of the company. Grace is the company’s accountant, while John Is in charge of operations and the day-to-day management of the company. Maria was appointed to the board solely on the basis that she made a considerable financial Investment in the family company.

However, Maria does not attend any board meetings and her ‘responsibility in the company’ is viewed by all the persons who are involved In the Company as simply a ‘voluntary’ one on the part of the other directors as recognition of her considerable financial contribution to the company and she does not take an active role in its management or decision-making. In fact, she is also very sick and spends more time in the hospital than at home.

Commercial and Corporate Law Research Paper

Although John Pty Ltd often enjoys a reasonable and profitable turnover (20m in 2008 financial year), it does unfortunately on a regular and frequent basis, suffer some significant cash flow problems.

The company is extremely slow in paying and meetings its bills as and when they fall due and currently it has a large number of overdue bills, such as wages and salary, superannuation, electricity, insurance, and rental bill. To add to the problems being faced by John Pty Ltd, one of its biggest clients, Bella Moda Pty Ltd, has been placed into liquidation on 5 January 2009. In a creditors meeting on the same day, the liquidator advises Grace that John Pty Ltd will only be able to receive one cent in the dollar on the amount owed to the creditors by Bella Moda Pty Ltd.

Commercial and Corporate Law Research Paper

Grace does not inform John about what the liquidator told her in respect to the fact that their major client has gone into liquidation because she does not want to make him concerned as he has enough to deal with in respect to the management of the company.

On 7 January 2009, John places a large order ($2.5m payable in 60 days) with their local supplier ABC Pty Ltd. Grace hears about the above order on 8 January 2009, and ‘suspects’ that John Pty Ltd may be insolvent. However, Grace expects the economy will be strong in 2009 and the business could get better very soon and requested a warehouse be repaired, which cost the company $50,000 payable in 30 days.

On 19 January 2009, John realizes the financial difficulty and calls a board meeting to decide the future of the company. Maria attends the discussion over the phone, and in her capacity as a major shareholder of the company, she indicated her willingness to lend $1m cash to the business if necessary (assume there is no contract being made, and Maria has no duty to make the payment). Accordingly, the board takes no action after the meeting.

Commercial and Corporate Law Research Paper

On 1 February 2009, the $2.5m goods arrive in one of the company’s warehouses and are immediately destroyed in a fire. John Pty Ltd is not compensated in any way and bears a total loss of $3m.

On 1 April, a liquidator, Philip was duly appointed. From an initial review of the financials of the company, it appears that the unsecured creditors are likely to receive only 10 cents in the dollar. The unsecured creditors are very angry at this prospect and seek the liquidator’s assistance to determine if there is any other way of raising additional funds from the company.

Please advise Philip, the liquidator, to what extent, the directors of John Pty Ltd may be held personally liable to the companyís debts. Please also discuss possible defenses under 588H.

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