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Sample Problem Questions

Question 1
Armtill CCFoods Ltd (Armtill) is a successful soft drink and snack foods manufacturer. Armtill has an
issued share capital of 4 million $1.20 shares. It decides to sell its snack foods business for $1M and
concentrate on its core beverage/soft drink business. Armtill has sufficient capital reserves to meet any
further acquisitions or expansion plans for its business. As it has no present use of the proceeds of the
snack food business the directors decide to return funds to its shareholders. This in part will make up
for low dividend payments to shareholders in the last three years.
Armtill seeks your advice as to how it can reduce its share capital and return these funds to
shareholders under the Corporations Law. Explain the methods available under the Corporations Law
for Armtill to undertake this transaction.
12 Marks

An answer to question 1 would consider the following:


A general discussion on the principles of maintenance of share capital.
How and why companies may wish to reduce their share capital. This case is similar to Re:Fowlers
Vacola. Give a summary of the decision and reasoning in this case.
Discussion of the process under section 256A-256D. Students should set out and discuss the
requirements of the section.

Question 2
Star.Com Ltd is a successful Internet company. Star.Com Ltd needs to raise capital to expand its
software research business. The Board is considering two possible ways of raising the capital. Firstly,
the possible public issue of redeemable preference shares; and the second option is to borrow money
from the Finance Group Ltd.
a)

Advise the Star.Com Ltd of the advantages and disadvantages of both methods of capital
raising.

After much consideration the Board of Star.Com Ltd resolves to go with the second option and borrow
the money from the Finance Group Ltd. The Finance Group Ltd has indicated that they want security
for the loan. Star.Com Ltd owns some buildings including two floors of a building in the City. Its
biggest asset is, however, its intellectual property in software.
b) Advise Finance Group Ltd what asset they should seek security over and advise whether they
should seek security by way of a fixed or floating charge.
Finance Group Ltd advance the funds under the security of a floating charge. Advise Finance Group
Ltd of the requirements and the procedure for registering the charge. What would be the consequences
for Finance Group Ltd if they failed to register the charge?
Finance Group Ltd advance the loan to Star.Com but due to the financial crash in the technology
market sector Star.Com defaults under the loan.
c)

The Finance Group Ltd wants to know their rights to appoint a receiver and what rights the
receiver has to exercise a power of sale over the charged assets. Advise Finance Group Ltd of
the receivers ability to exercise a power of sale.

Students should answer all three parts of this question.


An answer to question 2 would consider the following:
Part a) would include:
a general discussion of share and loan capital.
discussion of difference between redeemable preference shares section 254A(3) and s254J; and
a discussion of loan capital, debentures and charges section 283BH
Part b) would include:
a discussion of the difference between fixed and floating charges.
a discussion of the consequences of crystillization (consider possible cases)
a discussion of registration of a charge under s262 and s263 and consequences for failing to register ie.
loss of priority as a secured creditor.
Part c) would include:
a discussion of the two ways to appoint a receiver, that is, by order of the court or by private
appointment and the differences between the methods.

a discussion of the powers of the receiver under s420 and the rights to exercise power of sale under
s420A-s420C.

Question 3
Victoria Universal Limited (VUL) is a successful Melbourne based company running a number of
different successful businesses. During its twelve years of operation it has generated significant
profits and each year it has reinvested these profits back into the business.
(i)

Francis is a shareholder who complains that while the directors had decided to pay a
dividend in late 2003, they have now reversed their decision. Francis seeks your advice in
regard to his rights to recover the dividend from VUL.

(ii)

VUL sells one of its less profitable businesses and is seeking to focus on its core
merchandising business. VUL has more share capital than it requires and Vincent and Ula,
the directors of VUL, seek your advice as to the requirements that need to be satisfied in
order to reduce the share capital by 15% and return this to all shareholders.

(iii)

Would it make a difference if the Board of VUL decided to engage in a share buy back of
all A Class shares in VUL and is reluctant to sell his share in a company he helped
found.

Students are to advise the parties in each fact situation,


(4 + 7 + 7 = 18 marks)

An answer to question 3 would consider the following:


i) a discussion of s254V & W. Also discuss when the court may intervene for non-payment of dividend,
s254U (Burland v Earle; Sandford v Sandford Courier Service).
ii) a discussion of the process under s256A-256D. Students should set out and discuss the requirements
of the section.
iii) a discussion of the process under s257A-257J. Students should set out and discuss the requirements
of the section.

Question 4
Andrew, Brian, Colin, Diana and Elizabeth were the directors of Gemsales Pty Ltd, a company engaged
in the business of importing and supplying jewellery as wholesalers to the local market.

The company decided that as the market was becoming more competitive it needed to expand its
business as it felt with increased volumes of sales it would be able to lower its prices and be more
competitive. In order to do so it obtained a $4 million dollar loan from the Friendly Bank Ltd. $3
million was used to buy more stock and $1 million was used to buy a large new warehouse and
showrooms from Traders Pty Ltd.
Colin was not at the meeting that had made these decisions as he was in hospital recovering from a
serious accident. Elizabeth, as was her usual custom, had not attended the meeting but signed the
requisite documentation agreeing to the expansion of the business and the getting of the loan. Diana
who attended, said she did not know if she agreed and abstained from voting. Andrew and Brian both
voted to go ahead with the expansion and the getting of the loan.
At about this time Brian has established contact with Victor, who was setting up a new business as a
retailer of jewellery. Victor was looking for reliable suppliers, but said he would not deal with
Gemsales Pty Ltd as he did not like Andrew, the Managing Director. Not wishing to miss out on such a
lucrative business opportunity, Brian arranged to set up his own business as a jewellery wholesaler and
a contract was entered into between Victor and Brian for the supply of jewellery.
Six months later, Brian resigned as a director. At the same time it was clear the company had overextended itself and was insolvent and could not pay the interest on its loans.
It also became clear that Brian was a major shareholder in Traders Pty Ltd and the other directors were
unaware of this at the time of the purchase of the warehouse and showrooms. Furthermore, Brian had
been approaching other established customers of Gemsales Pty Ltd and had secured orders for his own
business.
Advise as to the liability of the parties both under common law and the Corporations Law.
(15 marks)

Sample Answer to Question 4


The first issue to deal with is the liability of Directors for payment of the interest on the loans to
Friendly Bank Ltd.
The courts will first decide whether or not the directors of the company have engaged in insolvent
trading and breached s588G. There should be a discussion of s588G (1)(2)(3); whether a debt was
incurred; suspicion of insolvency; what company insolvency means: s95 A (1) defines solvency as
being able to pay debts as and when they fall due. S95 A (2) defines insolvency as not being solvent. In
this situation it is highly likely that the company will be declared insolvent.
When a company is declared insolvent the courts are prepared to lift the corporate veil and go behind
the company to attach liability to the directors under s588G where the directors had a duty to prevent
insolvent trading an exception to the Separate Legal Entity Doctrine was established in Solomon v
Solomon & Co Ltd.
Once you can establish a prima facie case of insolvent trading by the directors you need to consider the
defences under s588H
Defences available to the directors are as follows:1) Colin would use the defence under S588H (4) which allows a director relief if he was ill at the time
when the debt is incurred. Although not relevant here there are cases used for a defence under this
section:
Metropolitan Fire Systems v Miller [1997] 23 ACSR 699
Powell & Duncan v Fryer [2000] 18 ACLC 480
Tourprint International Pty Ltd v Bott [1999] 17 ACLC 1543
ASIC v Plymin, Elliot & Harrison [2003] VSC 123 (Water Wheel case)
Southern Cross Interiors P/L v D Com Tax [2001] NSWSC 621
Also see appeal decision in DC of T v Clarke [2003] NSWSC 91

2. Given that Dina had abstained from voting, she may be able to use the defence under S588H (5)
where a director may not be liable if they took reasonable steps to prevent the debt being incurred. If
Diana had tried to talk the other directors out of proceeding with the loan and had voiced her concerns
and had backed them up with positive action such as resigning her position as director then she may
escape liability. However, simply abstaining from voting would not be enough to prevent liability (**
But see s588H6)
3. If directors had reasonable grounds to expect solvency S588H (2) they may also be able to use this
as a defence. Elizabeth could not use this defence as she had not attended any meetings and seemed to
make no attempt to acquaint herself with the affairs of the company
(CBA of Aust v Friedrich, Tourprint International Pty Ltd v Bott [1999] 17 ACLC 1543, ASIC v
Plymin, Elliot & Harrison [2003] VSC 123 (Water Wheel case), Southern Cross Interiors P/L v D Com
Tax [2001] NSWSC 621;
also see appeal decision in DC of T v Clarke [2003] NSWSC 91).
4. Brian could not use the defence that he was no longer a director of the company as he was involved
at the time the debt was incurred (S588G
5. Andrew appears not to fit into any categories outlined above and therefore would probably also be
held liable under S588G to Friendly Bank Ltd
6. Also consider consequences where director is liable for insolvent trading and some of the orders that
can be made under Sections 588J-588Q and s1317E.
The second issue is that of Brians breach of directors duties which he owed to Gemsales P/L. Brian
had fiduciary duties at common law as well as duties under S180-183. Common law duties as a
fiduciary to Gemsales P/L include:-

duty to act bona fide and in good faith.

duty to act with care, skill and diligence.

Statutory duties under S180-183 include:S181

duty to act in good faith

S180 (1) duty of care, skill and diligence.


S182 & 183)

duty not to misuse the position or make improper use of information gained
whilst in the position of director.

Breaches of these duties are discussed below:I)

Brian has a statutory duty to disclose material interests to the company (S191.) This includes
when he has an interest in a contract being entered into with the co-Traders P/L contract with
Gemsales P/L. As well as breaching this provision he has breached S181 by failing to act
bona fide (in goods faith) and has also breached his common law fiduciary duty to avoid
conflicts of interest (Cook and Deeks)

2) Brian has also breached duties by using his position as director for personal gain to the detriment
of the company and misusing information gained whilst in the position of director of Gemsales.
(S182 & 183.) He has done this by approaching Gemsales customers who have then placed
orders with Brian which would have been to the detriment of Gemsales. This has also breached
common law fiduciary duties by usurping corporate opportunities which would otherwise have
been taken up by Gemsales (Pacific Shipping Co. Case.) This is also a breach of directors
requirements to act in goods faith S181 and common law.
3) Brian has also usurped a corporate opportunity by dealing with Victor to supply him jewellery.
Victor stated that he did not like Andrew and therefore did not want to deal with Gemsales.
However, if Brian had been acting in the best interests of the company he would have brought
the matter to the attention of the other directors who would have then been in a position to
take action to remedy the situation. Again, Brian failed to act bona fide (in goods faith) and
breached S181 (Regal Hastings Ltd v Gulliver).
Remedies available to Gemsales P/L could include:
a.

Brian may have to pay Gemsales profits made from his personal contracts (Furs
Ltd v Tomkies).

b.

S1317HA(1) also allows for recovery of profits by Gemsales and compensation for
loss or damage caused by Brians breaches of his duties under S180-183

c.

The contract with Traders P/L may be voidable at the will of Gemsales P/L (Kinsela
v Russell Kinsela P/L.)

Question 5
James runs a single director proprietary company called Jamboos Pty Ltd.
(a) Explain the rules that Jamboos must operate under and the powers of James under the
Corporations Act.
(b) James is considering bringing his brother into the company as a shareholder. Explain what
difference that will make to the company.
(c) James wants to raise more capital to increase the size of the company and expand its business.
What options does James have in seeking to raise more funds?
(d) Assuming James considers some form of capital loan, explain the types of debentures that can
be issued by a company.
(e) Explain the implications of Jamboos becoming a public company.
[4x5=20 marks]

Sample Answer to Question 5


(a) S114 states that a company must have at least one member. James is a single director of
Jamboos Pty Ltd. Being a proprietary company, it can adopt the replaceable rules. S134; s135
process of adopting rules. Section 141 sets out a table of replaceable rules. James does not
have to appoint a company secretary. S198E states that the director of a proprietary company

who is its only director and only shareholder may exercise all the power that this Act or
companys constitution (if any) requires the company to exercise in general meetings. The
business of the company is to be managed by or under the direction of the director. For
example, the director may issue shares, borrow money and issue debentures. S198E(2)
provides that a director of a single director proprietary company can sign, draw, endorse or
otherwise execute negotiable instruments. A director of a single director Pty Co does not have
to disclose material personal interest S191(5). The person who is the only director and
shareholder in a Pty Co. is to be paid any remuneration for being a director that the company
determines by resolution S202C.
Proprietary companies with one director may pass a resolution by recoding and signing the
record S248(G). They may also do the same with declarations S248B(2).
(b) If James brings his brother in as a shareholder the rules for a single director proprietary
company will change, as there are now two members. Under S45A(2) Jamboos Pty Ltd would
be classified as a small proprietary company. Under S292(2) a small proprietary company
need only prepare financial statements if directed to do so under S293 (shareholder direction)
or S294 (ASIC Direction). This question does not sate whether James brother will be a
director or not. If he is not a director, then the provisions in a single director proprietary will
still exist, i.e. with regard to resolutions, declarations and negotiable instruments.
(c) If James wants to raise more capital and increase the size of his company he can do so by two
methods. The first is by share capital. S113(3) prohibits capital raising from the public. You
can, however, offer shares to individuals. A proprietary company must not have more than 50
non-employee shareholders S113(1). S113(3) provides that a proprietary company must not
engage in any activity that would require disclosure, except for an offer of its shares to a)
existing shareholders or employees of the company or of a subsidiary of the company. Also
note the consequences for breaching s113(3) under s165 where ASIC can order the company
to convert to a public company.
The only other way to raise share capital is to float and become a public company. Then you
can offer shares to the public. If this is the case then you must comply with S706.
Under S708(1) there are offers to certain bodies that do not need disclosure. The other type of
capital raising is by loan from a financial institution.
(d) If James considers some form of loan capital, then debentures would not be an option as
debentures are for public companies only. There are two main types of debentures: mortgage
debentures S283BH(2) where no more than 60% of the borrowers interest in the land can be
borrowed, and ordinary debentures S283BH(3). This is a change over personal property.
There must be enough tangible property to satisfy the amount borrowed. There are also

convertible debentures. These debentures are converted at the end of the loan into shares in
the company. If there are debentures then a Trustee for Debenture holders must be
appointment S283AA. There must also be a deed of trustee S283AB. S283AC provides who
can be a trustee. There are public trustees and state trustees, which includes banks. S283BB
states that the conduct of a borrower must be in a proper and efficient manner.
(e) If Jamboos became a public company it would have to comply with financial reporting
requirements. S286 & S291 sets out the obligations. The reporting of a company must be
lodged with the ASIC. Any capital raising or reduction must be approved by resolution of the
members. Disclosure rules in S706 must be complied with. An AGM must be held within 6
months of the end of the financial year S250N.

Question 6
Joe and Mary are shareholders of the Australian Conscientious Taskforce Pty Ltd (known as ACT).
The company buys shares in Australian companies in order to pressure the company to act
properly according to community standards. ACT has focused on companies which produce and
market tobacco products, particularly Tobacco Products Ltd. Tobacco Products Ltd has been

accused of marketing its products to underage smokers, which has resulted in substantial fines for
the company. ACT believes that the directors knew of the illegal activities, or at least should have
known. The company is refusing to take any action against the directors.
Joe and Mary intend to go to the forthcoming general meeting. They seek your advice on the
following:
1.

Can they question the Board on the above matter?

2.

Can they put a resolution to the meeting condemning the inaction by the Board?

3.

What other actions might the group be able to undertake in order to have the company and the
directors brought to account?

[15 marks]

Sample Answer to Question 6


An Annual General Meeting of a company can only be attended by members of the company. If
Joe and Mary are representing ACT then they have a right to be at the meeting.
S250S provides that the chairman of an AGM must allow a reasonable opportunity for the
members as a whole at the meeting to ask questions or make comments regarding the management
of the company. So in answer to the questions on whether or not they can ask a question to the
board, the answer is that the chairman of the AGM does not have a specific duty to them as
individuals, but they can ask questions, that is if they are chosen at the AGM.
Under S249N a member has the right to require a company to put resolutions to be considered at a
general meeting. Provided the members have at least 5% of the votes that may be cast or at least
100 members entitled to vote, they may give a company notice of a resolution that they propose to
move at an general meeting. If a company has been given notice of a resolution, the resolution is
to be considered at the next general meeting that occurs more than two months after notice is given
S2490(1). The company must then give all its members notice of the resolution at the same time,

or as soon afterwards as practicable, and in the same way as it gives notice of a meeting S2490(2).
If the group cannot put a resolution to the AGM, the other avenue they can take is that of breach of
directors fiduciary duties.
There are common law fiduciary duties and statutory law duties. S181 states that a director must
act in good faith and in the best interests of the company and for a proper purpose. If ACT is a
minority shareholder they can bring an action against the directors on behalf of the company based
on grounds they may have as minority shareholder.
At common law they would need to come within one of the 5 exceptions to the rules in Foss v
Harbottle. These days because the right to bring a derivative action has been limited by s236(3), it
probably would be easier to use s232-235. Under s232 it could be argued that the directors
breached their duty to the detriment of the company by acting oppressively or in an unfairly
prejudicial or unfairly discriminatory matter.
In this case the company is being fined for the illegal activities the director knew about or should
have known about. To have standing to sue under s232 you need to come under s234. Section 233
sets out the order the court can make where oppressive conduct can be proved. Section 233(1)(g)
states that the court can make an order under this section that it considers appropriate in relation to
the company. If the directors are found to be in breach of their directors duties, they can be
disqualified from managing a company S206C. If the court finds there to have been a
contravention they must declare the contravention S1317E. S1317F states that a declaration is
conclusive evidence of the contravention. S1317H could apply for the directors to pay
compensation, but I think S1317P criminal proceedings can be commenced after civil proceedings.
But it must be proven that the directors were in breach of their duty as directors of the company.