Student ID No: _ Pages: 6

Questions: 4

UNIVERSITY OF TASMANIA

EXAMINAnONS FOR DEGREES AND DIPLOMAS

JUNE 2009

BFA241 CORPORATE REGULATION AND

ACCOUNTABILITY

Examiner: Simone Watson

Time Allowed: THREE (3) hours

Instructions:

• There are FOUR (4) questions.

• ALL questions carry equal marks. Marks are indicated for parts of questions.
• Write your student number clearly at the top of this examination paper.
• When you have finished the examination, place the examination paper inside
your examination answer booklet. Do not remove any part of the examination
paper from the examination room.
2 BF A241 - Corporate Regulation & Accountability

Question 1

You are a non-executive director of Cherries From the Tasman Pty Ltd. Your
company grows and packs cherries for sale both within Australia and internationally.
The managing director, Sunni, has approached you to provide advice in relation to a
dispute with a large Australian supermarket chain. This supermarket chain has been
purchasing large quantities of cherries from your company for the last 10 years. The
contract for supply of the cherries is negotiated on a yearly basis and the supermarket
pays for the cherries after they have been delivered. Sunni negotiated the selling price
for 2008 with the supermarket at $8 per kilo for 40,000 kilos. Usually the supermarket
only buys 2,000-4,000 kilos per year. This discussion occurred in January 2008. The
cherries were supplied for 2008 and the invoice for $320,000 was due to be paid by 30
March 2009. As at 25 May 2009 it had still not been paid.

The supermarket is arguing that the contract for sale at the price of $8 per kilo that
had been agreed with Sunni had been reduced by Carol, Cherries From the Tasman's
commercial customer sales manager, to $6 per kilo in discussions in March 2008.

The supermarket contends that as they have always dealt with Carol, and she agreed
to the lower price, they assumed that she was authorised to carry out the negotiations.

Sunni says that as this was an important contract that the supermarket should have
known that if she negotiated the price then only she could reduce it later, not Carol.
Further, Sunni had told Carol on several occasions that all negotiations with the
supermarket would be done by Sunni.

Required

Provide Sunni with written comments in relation to the rights and obligations of the
two companies with regard to the contract. Include consideration of the Corporations
Act 2001 and relevant cases.
[Total for Question 1 = 25 marks]

continued '"
SFA241 - Corporate Regulation & Accountability 3

Question 2

Jo, Sue and Lin are directors of a public company, Eastern Imports Ltd. Eastern
Imports Ltd is in the business of importing and wholesaling a range of goods from
Asia including furniture and home wares. Recently Far Out East Pty Ltd, a company
that has recently been formed and who intends to retail furniture and other goods
made in Asia, has purchased a large number of shares in Eastern Imports Ltd. As a
result of this purchase Jo, Sue and Lin arrange a meeting with the sole director and
shareholder of Far Out East Pty Ltd, Michael.
Michael shows a great enthusiasm for importing and wholesaling and has great family
connections throughout Asia. Jo, Sue and Lin decide that Michael could be extremely
beneficial to their company and invite him to be a non-executive director. Michael
accepts the appointment. About one month later in a board meeting Michael tells J 0,
Sue and Lin that his uncle owns a large furniture manufacturing plant in Indonesia
and that he is looking for an Australian importer to supply to. Michael is keen for
Eastern Imports Ltd to begin negotiations with his uncle. Michael has also been
negotiating with his uncle to supply home wares to his other company Far Out East
Pty Ltd.
Required
a Examine whether Michael has a potential conflict of interest as a director of the
two companies. If so, what steps should he take to ensure that he will not breach
the fiduciary and statutory duties that he owes to both companies? Discuss.
[12lh marks}
b Consider what sections of the Corporations Act (2001) may apply in this
situation and what action Michael can take to avoid contraventions? Discuss
[12lh marks}
[Total for Question 2 = 25 marks}

continued ...
4 SFA241 - Corporate Regulation & Accountability

Question 3
You are a non-executive member of the board of directors of a publicly listed
company which manufactures specialty recreational vehicles, such as large four wheel
drives and other off road vehicles. You have received the following email from the
company's executive director who is responsible for operations:-

" Dear -----

As you have been on holidays for the last 2 months I am not sure if
you have been kept up to date as to the impact that the global
financial crisis has had on our operations. We have suffered a
significant downturn in orders (we had one order last month) and
whilst we have been doing all we can to keep the company going I
am not so sure that this is still the right thing to do. I am sure that
you have noticed that most of the employees are just standing
around in the factory and have nothing to do all day. We really
can't keep going like this as I can't see it getting any better.

I am very worried about this and whilst I am no expert aren't we at

risk of insolvent trading if we keep going? Perhaps we should do
something now to prevent that? Perhaps a voluntary administration
may be the way to go?

If you agree perhaps you could prepare something for the board
meeting next week?

Thanks
Frank"

Required

Provide a concise report to your Board on the following:-

a What is a 'voluntary administration'

[1 YJ marks]

b What is meant by the term "risk of insolvent trading"?

[1 YJ marks]

c What is the procedure to place a company into voluntary administration in this

circumstance?
[5 marks]

d Should this company consider voluntary administration. Why or why not? What
other options may be available to it?
[7 marks]

e What will happen once the company is placed in voluntary administration?

[10 marks]
[Totalfor Question 3 = 25 marks]

continued ...
SFA241 - Corporate Regulation & Accountability 5

Question 4

You have just been appointed a liquidator for a publicly listed company. You have
managed to determine the following facts about the company. Assume that this
situation is occurring today:

o The company has outstanding accounts from a number of its suppliers that date
back at least 12 months.
• Until May 2009 the company was able to pay its accounts, although many were
being paid two to three months after they became due.
o At all times all 3 executive directors (Bob Smith, Ming Li and Fan Lee) were
aware of the financial situation of the company and, believing that they could
trade out of their financial situation, they continued to run the business as usual.
One director, Ming Li, has been absent from the company for the last 6 months
as he is undergoing treatment for a serious illness.
o On 15 April 2009 Bob Smith, the managing director, took $150,000 from one of
the company's accounts for "arrears in salary" and sold 1,000 of his shares in
the company.
o On 20 March 2009 Fan Lee, another executive director 'purchased' one of the
company's motor vehicles, (a 2006 Mercedes Benz, purchased in 2007 by the
company for $100,000) at a price of $25,000 to provide to his wife as a gift.
o On 5 May 2009, Carol Smart, the company's secretary, fearing that her
incompetence may be discovered took home five boxes of confidential company
paperwork. This paperwork is of interest to you as a liquidator.
o The company was ordered to be compulsorily wound up on 5 June 2009 because
of its inability to pay its debts.
o The employees have not been paid wages since 1 May 2009.
o A finance company has a fixed charge over the manufacturing plant. The charge
was created on 3 September 2007. It has not been registered.
o A supplier has a floating charge over all of the company's stock in trade. This
charge was created and registered on 5 February 2008.
o The father of one of the directors lent the company $30,000 and $15,000 of this
remains outstanding.
o Another supplier is claiming that the company has not paid $35,000 for stock
supplied by them and that their terms of trade contain a retention of title clause.
o The total outstanding invoices amounts to $220,000.
• The company's premises are mortgaged to the State National Bank as security
for a loan of $500,000 with an amount outstanding of $289,000.
• The liquidator's fees are likely to be $31,000.
o The company currently has $68,000 cash in the bank, real property valued at
$780,000, stock in trade of $85,000 and equipment valued at $27,000.

continued ...
6 BFA24l - Corporate Regulation & Accountability

Required

You are required to provide a concise report on the following:-

a Why is it important to identify clearly the date on which the company became
unable to meet its liabilities?
[1 mark]

b What legal actions can be taken by you as liquidator against each of the directors
and what are the likely remedies?
[12 marks]

c In what priority will the creditors be paid and to which assets/pool of assets will
they be entitled and why? Be sure to include all of the relevant law in your
answer.
[12 marks]

[Total for Question 4 = 25 marks]