Honasil UNIVERSITY Lek cee ii Monash University Semester One Examination Period 2009 EXAM CODES: Lawat71 TITLE OF PAPER: CORPORATIONS LAW 406 EXAM DURATION: 2 hours writing time READING TIME: 30 minutes settling / reading & noting time THIS PAPER IS FOR STUDENTS STUDYING AT: (tick where applicable) DBerwick Clayton O Malaysia Off Campus Learning O Open Learning O Caulfield GGippsiand Peninsula. Cl Enhancement Studies Oi Sth Africa O Pharmacy 1 Other (specity) During an exam, you must not have in your possession, a book, notes, paper, electronic device/s, calculator, pencil case, mobile phone or other materiaV/item which has not been authorised for the ‘exam or specifically permitted as noted below. Any material or item on your desk, chair or person will be deemed to be in your possession. You are reminded that possession of unauthorised ‘materials in an exam is a ciscipline offence under Monash Statute 4.1 No examination papers are to be removed from the room. AUTHORISED MATERIALS. CALCULATORS Oves ZNO OPEN BOOK wa YES NO SPECIFICALLY PERMITTED ITEMS O Yes NO Page 1 of 6INSTRUCTIONS TO CANDIDATES 1. The duration of the exam allows time for you to plan your answers, and you are strongly encouraged to do so, 2. The standard of expression, spelling, punctuation and grammar will be taken into account in the assessment of your answers in this examination, 3. Write your student ID number (but NOT your name), your lecturer's name and stream on the cover of each answer booklet used, ‘Stream 1: John Duns ‘Stream 2: Normann Witzleb 4. This examination is worth 60% of the assessment in this unit if you chose assessment options 1, 2 or 3. This examination is worth 100% of the assessment in this unit if you did not undertake any other assessment during this unit. 5. This examination consists of TWO PARTS. All students MUST answer BOTH parts. 6. The answer to EACH PART needs to be written into SEPARATE BOOKLETS. 7. Part A contains THREE QUESTIONS. All students MUST answer ALL THREE questions. 8. Part B contains TWO QUESTIONS. You must CHOOSE and ANSWER ONE QUESTION only. 9. Each question indicates the maximum points available and the writing time you should allocate to each question. 10. You can assume that the replaceable rules in the Corporations Act 2001 (Cth) apply to any company mentioned unless otherwise specified. 11. further information is required in order to answer the question state in your answer what that information is and what difference it would make to your answer. 12. You are not permitted to remove this examination paper from the examination room. Page 2 of 6PART A (You must answer ALL QUESTIONS in this part) Background Marino Holdings Ltd (Marino), Gusto Developments Ltd (Gusto) and Prime Property Ltd (Prime) form a corporate group. Gusto holds 74% of shares in Prime, which in turn owns all of the issued shares in Marino. The remaining 26% of shares in Prime are held by others, mostly members of the Australian public. Prime owns a diversified portfolio of commercial properties and companies holding such property. Marino's sole asset is a valuable truckstop site just out of Melbourne (the Site). In 2006, the group became interested in developing the Site as a transport terminal. At the time, Gusto was a well-regarded building and development company. Mr Drake is the managing director of Gusto. He is also a substantial shareholder in Gusto. After Gusto acquired its interests in Prime, he has also become a director of Prime and Marino. Ms Amler is the managing director of Prime and Marino. She has been a corporate executive for many years and significant experience in business administration. Mr Radolph is company secretary of Marino and Gusto. ‘The development project Feasibility and costing studies commissioned by Marino indicated that the development of the Site ‘would require capital of AS15m until completion. In 2006, Marino and Gusto negotiated a Development Agreement according to which Gusto would bear the cost of development until completion. Marino intended to sell the developed site to freight companies and repay Gusto from the sale proceeds. At that point, Gusto was well-resourced and would have been able to finance the project in its ordinary course of business. In separate meetings, the Boards of Gusto and Marino considered the project plans, profit projections and the proposed agreement in detail. After both companies were satisfied with the deal, they entered into the agreement. Marino provides a Mortgage ‘When the development reached halfway to completion, Gusto encountered difficulties marketing one of its other large projects. As a result, it had insufficient funds to complete its work on the Site. It needed to borrow $5 million from a financier. After negotiations with several banks, Gusto found Napier Credit (Napier) which was willing (o give a loan to Gusto but required Marino and Prime to provide security. Napier prepared a draft document which contained both a mortgage of Marino over the Site (the Mortgage) and a guarantee by Prime (the Guarantee), jointly securing the loan of $5 million to Gusto (the Joint Security), Mr Drake and Ms Amler, who made up the board of directors of Marino, considered that the completion of the Site was of paramount importance for the group as a whole. They believed that the best way forward was for Gusto to complete work on the site and for Marino to ‘do its share" by providing the mortgage, as required by Napier. When they met as the board of Marino, Ms ‘Amler asked Mr Drake how Marino’s interest in completion of the Site was protected. Mr Drake explained that Gusto would arrange for a performance bond in favour of Maritio (ie. a third party ‘would indemnify Marino if Gusto defaulted on its Development Agreement with Marino). This assurance was minuted. Mr Drake and Ms Amiler then resolved to approve the Mortgage and validly executed the Joint Security. Page 3 of 6Prime provides a Guarantee Prime's board of directors consisted, apart from Mr Drake and Ms Amler, also of Mr Harinda as a ‘non-executive member of the board. Mr Harinda is Chief Financial Officer of a medium sized property consultancy firm and has been appointed to the board of Prime because of his extensive industry contacts. At a board meeting, all directors of Prime considered the relevant documentation, including the proposed Joint Security, the minutes of the board meeting at which Marino approved of the Mortgage-and updated marketing reports for the Site. They concluded that entering into the Guarantee was necessary to allow Gusto to complete the development of the Site and that the sale of the Site on completion would bring substantial profits to Gusto, Marino and, through Prime's shareholding in Marino, also to Prime. Prime’s Approval of the Guarantee To enable Gusto to take out the loan from Napier, all members of the Board of Prime approved of entering into the Guarantee. The relevant extracts of the minutes of the board meeting of Prime provide as follows: ‘APPROVAL OF GUARANTEE: The directors noted that the entry into the transaction evidenced by the Guarantee should be approved by the Compan APPROVAL OF EXECUTION: RESOLVED THAT the Company affix the ‘common scal and deliver the Guarantee in such form as any duly appointed Representative of the Company attesting the affixing of the common seal shall approve. ‘APPOINTMENT OF AUTHORISED RESOLVED THAT Alana Amler and Warren REPRESENTATIVES: Drake be appointed the authorised Representatives of the Company to execute and deliver for and on behalf of the Company all such documents, instruments and communications necessary or desirable to be executed and delivered by and on behalf of the Company pursuant to and in accordance with the Guarantee. ‘The Execution of the Guarantee ‘The Guarantee on behalf of Prime was signed by Mr Drake and Mr Radolph. The execution clause reads: ‘THE PARTIES sign seal and deliver this document as their Deed. SIGNED for and on behalf of PRIME PROPERTY LIMITED by its attorney in the presence of Page 4 of. 6‘The document does not contain an impression of a seal. Mr Drake signed in the space following. the word ‘attorney’ and Mr Radolph signed at the place indicated for the signature of the witness. Mr Drake presented a copy of the minutes extracted above to the representatives of Napier. Napier had checked the ASIC register and was aware that Mr Drake was a director of Gusto, as well as Prime and Marino, and that Mr Radolph was a secretary of Marino and Gusto, but not of Prime. Napier then also executed the document. Gusto’s financial difficulties At the time the Joint Security was provided, all directors were aware of Gusto's cash flow problems but only Mr Drake knew that there was a real possibility that Gusto would not be able to discharge its obligations under the loan During the course of 2008, Gusto’s financial difficulties spun out of control. It ceased work on the Site but continued to draw on the loan funds provided by Napier to enable its general operations to continue. In late 2008, Gusto defaulted on the loan and went into liquidation, Napier intends to enforce its security under the Mortgage and Guarantee. It turns out that, contrary to Mr Drake's assurance to the board of Marino, Gusto never obtained the performance bond. ADVISE ON ALL THREE OF THE FOLLOWING QUESTIONS: 1, Is Prime bound by the Guarantee? (20 marks = 24 minutes writing time) 2. Ms Sunday is one of the shareholders of Prime. She has obtained a copy of the Joint Security and is outraged that Mr Drake and Ms Ambler entered into this transaction without sufficiently protecting Prime and Marino against the risk of Gusto defaulting on the loan or using the loan for purposes unassociated with the development of the Site, She asks your advice on whether Mr Drake and Ms Ambler acted in breach of their general law or statutory obligations as directors of Marino when they approved of providing the Mortgage and executed it accordingly? She also asks about Mr Harinda’ liability as a director of Prime. If your advice is that they are liable, what is the extent of their liability? (40 marks = 48 minutes writing time) 3. Assuming that breaches of directors’ duties can be established, what can Ms Sunday now do to protect the interests of minority shareholders of Prime? (20 marks = 24 minutes writing time) Page 5 of 6PART B (You must answer ONE QUESTIO} this part. The answer to this part must be written into a separate booklet) 1 Section 170 of the Companies Act 2006 (UK) provides: ““(1) The general duties specified in sections 171 to 177 are owed by a director of a company to the company. {...} (3) The general duties are based on certain common law rules and equitable pi they apply in relation to directors and have effect in place of those rules and principles as regards the duties owed to a company by a director. (4) The general duties shall be interpreted and applied in the same way as common law rales or equitable principles, and regard shall be had to the corresponding common law rules and equitable principles in interpreting and applying the general duties. (...}" How does this regime differ from directors’ duties under Australian law? Should Australia adopt a similar provision? (20 marks = 24 minutes writing time) OR “The general law has an adequate range of remedies to respond to breaches of directors’ duties. There is no need for ASIC to be inyolved in this area.” Critically assess the role of ASIC in the enforcement of directors’ duties. (20 marks = 24 minutes writing time) END OF EXAMINATION Page 6 of 6