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Case Study Exercises 1 – Corp Veil Plasto Pty Ltd was a small manufacturer of plasterboard. Its shareholders and directors were John and Peter. Many of the Plasto Pty Ltd’s customers complained about the quality fo the plasterboard that Plasto manufactured. The Plaster had been falling off the walls and in many cases had to be replaced. Some of the Plasto’s customers threatened to take legal action against Plato Pty Ltd, alleging their plasterboard breached the guarantee of acceptable quality. John and Peter were fearful that Plasto Pty Ltd would lose the threatened legal actions and that it did not have enough money to pay the damages claims. They therefore decided to form a new company, Plasto Australia Pty Ltd, transfer all of the assets of Plasto Pty Ltd to the new company and continue to trade under the new company. Plasto Pty Ltd was not in liquidation but was left an empty shell with no money, business and other assets. Advise the customers whether they can make John, Peter and Plasto Australia Pty Ltd liable for the damages caused by Plasto Pty Ltd. Material facts: 1) Proprietary limited company (small manufacturer but may be not small company) 2) Directors John and Peter 3) Customers - Quality control and Breach of Quality 4) J&P - Australia pty ltd 5) Veil - Salomon vs Salomon corporation (1897) Ac 22 (page 34) (S124, separate legal entity) Issue: Are John, peter and Plasto Australia Pty Ltd liable for the damages caused by the Plasto Pty Ltd. Relevant Law: 124 court will lift the corporate Veil Relevant cases: Salomon, Gilford Motors, Darby, Bestobell, Jones vs Lipman Analysis: Discuss salomon and the concept of the company as a separate legal entity and the veil of incorporation. According to Salomon vs Salomon corporation (1897) Ac 22 (page 34), John Peter Plasto Australia Pty Ltd, and Plasto Pty Ltd are separate legal entities. John Peter and Plasto Australia Pty Ltd are not liable for damages caused by Plasto Pty Ltd. However, this scenario may fall into one of the exceptions to the general law. The corporate veil can be lifted where a company is incorporated for the purpose of avoiding an existing obligation (Gilford Motor Company) or where the company is a facade (Jones v Lipman) Plasto Australia Pty Ltd was formed for the purpose of avoiding Plasto Pty Ltd’s existing legal obligation to its customers. The corporate veil could be lifted, making Plasto Australia Pty Ltd liable for the claims against Plasto Pty Ltd. In this case there is no exception to the general rule allowing the veil to be lifted to make John and Peter liable.

Case study 2 - Corporate Structures For the past year Dr Nick Riviera, a bio-geneticist, and 25 of his colleagues at the Hollywood Upstairs Medical College have been worrking on a research project in their spare time to develop genetically modified brussels sprouts that taste like chocolate. While they believe that their project has the potential to earn significant amounts of money, considerable additional research and development is still required. Indeed, early testing of the genetically modified brussels sprouts caused the internal organs of laboratory rats to melt. If the development of the genetically modified brussels sprouts is successful Dr Nick Riviera envisages that thousands of people may want to invest in the venture. Advise Dr Nick Riviera about the most suitable type of company for his brussels sprouts project.

Case 2: Material facts: 1. Dr. Riviera is a biogeneticist + 25 colleagues → can’t have partnership because partnerships have a maximum of 20 partners 2. Project breakthrough has potential to earn significant money but needs more research and development (experiment with rats) → RISKY! 3. they want to raise capital. so they must have a company structure issue: what is the best type of company? Public company vs proprietary company Types of public companies: a. Limited by shares - can raise funds from the public (shares) → OK! b. Limited by guarantee - for non-profit (but they want to earn profit); no shareholders (they want to raise funds) → NOT SUITABLE c. Unlimited - because it’s very risky, not advisable d. No liability - for mining companies only → CANNOT Types of Proprietary company: a. unlimited - because it’s very risky, not advisable b. limited - they would need to file returns IF 5% of shareholders request it, if it’s a subsidiary of a foreign holding company, if it’s a large proprietary company ** Best option for them is a SMALL PROPRIETARY COMPANY with an option to make it into a public company. It is not advisable for them to form a large proprietary company because it will have the same obligations as a public company but more limited.) Case study 3 – Annual FS – Pty v Public Abe was recently appointed company secretary of Mich-Phil Autos Pty Ltd, the operator of a successful used car dealership. Abe noticed that Mich- Phil Autos Pty Ltd did not prepare annual financial statements for the previous financial year. (a) Explain whether or not Mich-Phil Autos Pty Ltd needs to prepare annual financial statements for the current financial year. (b) To what extent, if at all, would your answer be different if Mich-Phil Autos was a public company? Material Facts:  Mich Phil Autos Pty Ltd - is a proprietary limited company  they did not prepare annual financial statements for the previous Issue: Is Mich Phil Autos Pty Ltd required to prepare financial statements? Analysis: S292 requires disclosing companies, public companies and large proprietary companies to prepare a financial report and directors report. Small proprietary companies are not required to provide audited financial statements unless requested by their members or ASIC. s45(2): 2) A proprietary company is a small proprietary company for a financial year if it satisfies at least 2 of the following paragraphs: (a) the consolidated revenue for the financial year of the company and the entities it controls (if any) is less than $25 million, or any other amount prescribed by the regulations for the purposes of this paragraph;

(b) the value of the consolidated gross assets at the end of the financial year of the company and the entities it controls (if any) is less than $12.5 million, or any other amount prescribed by the regulations for the purposes of this paragraph; (c) the company and the entities it controls (if any) have fewer than 50, or any other number prescribed by the regulations for the purposes of this paragraph, employees at the end of the financial year. Note: A small proprietary company generally has reduced financial reporting requirements (see subsection 292(2)). As per s286 a company must keep written financial records. If it’s a public company, it MUST prepare financial statements. Case Study Exercise 4 – Apparent Authority, Assumptions Fawlty Trucks Pty Ltd carries on an interstate trucking business. It has two directors: Basil, the managing director, and his wife Sybil, who is also the company secretary. Apart from its fleet of trucks, the company also owns the house where the directors live. Basil and Sybil's marriage has broken down and they have separated. Sybil continues to live at the house and is not involved in the day-to-day operations of the company's business. Basil lives in a hotel with his son, Manuel. Three months ago Basil, without telling his wife, borrowed S100,000 from Eastpac Bank. The money was for his own use. The loan was secured by a first mortgage over Fawlty Trucks Pty Ltd's house, occupied by Sybil. The mortgage was executed under the company's seal, witnessed by Basil as director and Manuel as company secretary. However, contrary to the company's constitution, board approval had not been obtained for the mortgage. At the time the mortgage was executed, Basil told the Eastpac Bank manager who approved the loan that Sybil had resigned as company secretary and that Manuel had been appointed to that position. Basil then took the $100,000 and disappeared with Manuel to Barcelona. Sybil has now been made aware that Basil mortgaged the house. She tells Eastpac Bank that Fawlty Trucks Pty Ltd was not bound by the mortgage. Explain whether Eastpac Bank can rely on the assumptions in s 129. Which assumptions are relevant? Case Study Exercise 4: (Fawlty Trucks) Material Facts:  Fawlty Trucks Pty Ltd - is a proprietary limited company  2 directors: Basil (MD) and wife Sybil (director & company secretary)  marriage broke down  Basil borrowed $100,000 for personal use from Eastpac Bank  Mortgage on the house (owned by Fawlty Trucks Pty Ltd)  mortgage executed with the company seal, witnessed by Basil (as MD) and Manuel (as co sec) Issue: Is the company bound by the mortgage? Analysis: 1. Apparent/ostensible authority - does Manuel have authority to enter into the mortgage? 2. Under s129, Eastpac can assume: a. s129(1) - that the company’s constitution and replaceable rules (if any) have been complied with b. s129(2) - person named as director or secretary is duly appointed and has customary authority c. s129(3) - person held out as an officer is duly appointed and has customary authority d. s129(4) - officers/agents of the company properly performs their duties to the company e. s129(6) - a document is duly executed by the company if the company seal is affixed and is witness accordingly

3. Under s128 (4): A person is not entitled to make an assumption in section 129 if at the time of the dealings they knew or suspected that the assumption was incorrect. If the Bank pays Basil directly in cash or puts the money in Basil’s account, it should be have suspected irregularity (and would not be entitled to make assumptions in s129). If the Bank put the money in the company’s account, it will be entitled to make the assumptions in s129. According to the principle in Bank of New Zealand v Fiberi Pty Ltd (1994) 12 ACLC 48, the mortgagee (Bank of NZ) was entitled to assume that the constitution was complied with even if the company secretary was not authorised (was not appointed according to the constitution). In Brick and Pipe Industries Ltd v Occidental Life Nominees Pty Ltd (1992) 2 VR 279, it was held that the other party could assume that it was duly executed even if one of the directors that witnessed the fixing of the seal was incorrectly identified. Conclusion: Fawlty is bound by the mortgage. Case study 5 - Oppression Lily and Morris are the directors and shareholders of Zap Graphics Pty Ltd. Recently, the company began to suffer cash flow problems and needed additional capital. Lily persuaded Rodney to invest $100,000 in Zap Graphics Pty Ltd. Lily and Morris held a directors‘ meeting and decided to issue Rodney with two shares in the company. A general meeting of shareholders also appointed Rodney as a director of the company. At the shareholders‘ meeting Rodney said that he would not be attending board meetings and wanted to be treated as a "silent partner". The company's financial position improved as a result of Rodney's $100,000 investment, as well as the considerable efforts of Lily and Morris. Despite the company's increased profits Lily and Morris decided not to declare a dividend for the current year. Instead they gave themselves pay rises and arranged for the company to lease two new Mercedes-Benz cars for their personal use. Rodney began to attend directors meetings and made a number of suggestions to improve the profitability of the business. He also questioned Lily and Morris about their pay rises. Lily and Morris resented these questions and took the following actions:  They formed another company, Lily, Morris & Carol Graphics Pty Ltd, in which Rodney was not involved, and diverted a valuable government design contract that they had been negotiating to their new company.  They also called a shareholders' meeting at which it was resolved that Rodney would be removed from his position as a director. The meeting also approved the diversion of the government design contract to Lily, Morris & Carol Graphics Pty Ltd. Lily and Morris made sure that Rodney did not receive notice of this shareholders’ meeting. Advise Rodney what legal remedies he has in these circumstances.

Material Facts:  Zap Graphics Pty Ltd  Lily & Morris are directors and shareholders  Rodney invest $100,000 and was issued 2 shares  Rodney was appointed as director  company’s financial position improved / increased profits  Lily & Morris decided NOT to declare dividends, gave themselves pay rises, leased 2 new Mercedes Benz cars for personal use

 Lily & Morris formed another company Lily, Morris & Carol Graphics Pty Ltd without Rodney, and diverted government design contract to the new company  Lily & Morris called shareholders meeting to remove Rodney as director and approve diversion of design contract to the new company, Rodney was not informed of the meeting Issue: 1. formation of the new company and diversion of the contract (oppression) - s232 - diversion of the contract is contrary to the interests of the members of the company as a whole - In Re Bright Pine Mills Pty Ltd (1969) VR 1002, the majority shareholder sought to deprive the minority shareholder from participating in the company’s profits. . 2. is the removal of Rodney as a director unfair? a. s203C sets out that a proprietary company can remove directors through a shareholders’ meeting - In Mopeke Pty v Airport Fine Foods Pty Ltd (2007) NSWSC 153, the company had 3 directors, 2 of whom are from the same family. The court held that the company operated as a quasi-partnership and it was unfair for the 2 directors (who formed majority of the voting power) to exclude the other director from management. Similarly, it is unfair for Lily & Morris to exclude Rodney. UNFAIR! . 3. diversion of profits from shareholders (oppression) - In Sanford v Sanford Courier Service Pty Ltd (1986) 5 ACLC 394, the directors paid themselves with a good compensation package and excluded other directors - In Shamsallah Holdings Pty Ltd v CBD Refrigeration & Air-conditioning Services Pty Ltd (2001) WASC 8, the company did not increase dividends in line with the increase in profits. The court held this as oppressive especially because the directors were increasing their pay every year. Remedy: Rodney can apply for remedies in s233, where the court can order Lily & Morris to buy his shares OR to wind up the company.

Case study Exercise 6 - Dividends – declaring The shareholders of ABC Ltd, a company formed to operate a large hotel, are concerned that although the company has been making a profit of 15% on shareholders’ funds, they have not yet been paid a dividend. The directors contend that surplus assets are required to build up working capital. Can the shareholders take legal action to force the directors to pay a dividend? If the company's assets exceed its liabilities and the directors intended paying all the surplus out as dividends, could the shareholders do anything to reduce or prevent the payment of these dividends? Material Facts:  ABC Ltd = public company limited by shares  profits of 15% of funds, but dividends not paid Analysis: 1. Can shareholders enforce dividend payment? Under s254U, the amount, timing of payment and method of payment of dividends are determined by directors. The shareholders can enforce a payment of the dividend IF the company’s constitution puts the power in the shareholders, else they cannot enforce the dividends. Under s254T, company must not pay a dividend unless its Assets exceed its Liabilities immediately before dividends are declared (Balance sheet test). It also has to be fair and reasonable to the shareholders as a

whole. The payment of the dividends should not prejudice the company’s ability to pay its creditors. If the satisfies all 3 conditions, they can pay dividends. Conclusion: No. 2. If directors pay all surpluses as dividends, can shareholders reduce or prevent payment of these dividends? Under s1324, shareholders can apply for a court to order an injunction Case Study Exercise 7 – Share Capital Reduction Ardvaark Ltd's directors would like to return as much capital as possible to its shareholders. Its share capital consists of class a shares with a $10 issue price per share paid up to $6 and class B shares which are fully paid. Advise the directors of the legal requirements regarding the following proposals: a) That the company cancels the $4 unpaid on each class A share; and b) That the company buys back 15% of the class B shares. Would your advice be different if Ardvaark Ltd had financial difficulties' Explain? Legal requirements for a. a company cancels $4 unpaid on each class A share: b. the company buys back 15% of class b shares: i. s257D special shareholder approval is required for buy backs  special resolution is required for selective reduction of shares ii. s257E - offer documents for the buy back should be lodged ASIC ii. s257F ii. s257G - buy back of shares requires disclosure of all relevant information ii. s256C - ordinary resolution is required for equal reduction; special resolution is required for selective reduction ii. s256B - reduction should be fair and reasonable to the company’s shareholders as a whole, does not materially prejudice the company’s ability to pay its creditors, and is approved by shareholders under s256C If the company is in financial difficulties, according to s256B, the company should not cancel the unpaid shares or buy back shares because it will materially prejudice the company’s ability to pay its creditors. According Trevor v Whitworth (18887) 12 App Cas 409, company is generally prohibited from reducing its issued share capital because a reduction in capital would prejudice the rights of creditors. (p.226 of book)

Case Study Exercise 8 – Dividends - insolvent A company's assets exceed its liabilities by $100,000 in the current year and the directors wish to declare that entire amount as a dividend to shareholders. One of the company's creditors is concerned that the company will become insolvent if the $100,000 dividend is paid. What (if anything) can the creditor do about this? Material Facts:  company’s assets exceed liabilities $100,000  directors want to declare entire amount for dividends  creditors are concerned that company will become insolvent Under s254T, company must not pay a dividend unless its Assets exceed its Liabilities immediately before dividends are declared (Balance sheet test). It also has to be fair and reasonable to the shareholders as a

whole. The payment of the dividends should not prejudice the company’s ability to pay its creditors. If the satisfies all 3 conditions, they can pay dividends. Creditors can apply for s1324 injunction to stop the dividend payment. Case Study Exercise 9 Eiffel Towers Ltd, a listed company, was a builder and property developer specializing in projects in Melbourne’s central business district. It has five directors. Giscard [Eiffel Towers Ltd's managing director) and Henri [the company's chief finance officer), were the only executive directors on the board. The others, all experienced business people, were non-executive directors and attended the monthly board meetings. Over the past two years Eiffel Towers Ltd's financial position had worsened. Apart from Henri, the directors were unaware that Eiffel Towers Ltd's liabilities vastly exceeded its assets and that it had difficulties paying its subcontractors and suppliers on time. Henri made sure the other directors were kept in the dark about this and did not give them meaningful or accurate financial information, The directors were satisfied with Henri's false assurances that the company’s finances were satisfactory. Several months ago at an Eiffel Towers Ltd's board meeting Giscard asked the board to approve the acquisition of a development site owned by Blue Sky Pty Ltd for $90 million, to be borrowed from Westpac Bank. He explained that this site was suitable for a 50-storey office building. The board agreed with his suggestions, notwithstanding that Giscard provided only sketchy details. In particular, the directors were unaware that Blue Sky Pty Ltd was controlled by Henri's wife and the company had been trying unsuccessfully to sell the development site for $20 million. The board was also unaware that the zoning laws did not permit the construction...