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School of Business Law and Taxation LEGT 2741 BUSINESS ENTITIES

SESSION 1 2008

FINAL EXAMINATION
Time Allowed: 3 hours Total Number of Questions: 4 Answer all FOUR QUESTIONS Each question is worth 15 marks

Each question must be answered in a separate book


Answers must be written in ink Candidates may retain a copy of this paper This is a closed book exam

QUESTION 1

(15 Marks)

In ABC Developmental Learning Centres Pty Ltd v Wallace [2006] VSC 171, Justice Bell held: there is no one answer to the question whether the criminal actions of employees (or directors or contractors) of a company can be counted as the actions of the company. Do you agree? Discuss the various ways in which corporate criminal liability can be established. Your answer must refer to relevant precedents and also include discussion on the significance of the ABC case (above) for principles of company law. QUESTION 2 (15 Marks)

ANSWER ANY 3 PARTS OF THIS QUESTION (3 X 5 MARKS) (a) The decision of the High Court of Australia in Sons of Gwalia has raised questions about the appropriate treatment of claims that shareholders may have as aggrieved investors against a company in voluntary administration or liquidation. [Corporations and Markets Advisory Committee Discussion Paper, Shareholder Claims Against Insolvent Companies, 2007] Discuss the High Courts decision in Sons of Gwalia Ltd v Margaretic (2007) 60 ACSR 292; [2007] HCA 1 and outline its implications for corporate stakeholders (investors, creditors and insolvency practitioners). (b)The courts have long recognised that the corporate form can be abused and the tendency of many business people to perform a kind of dance of the corporate veil and to duck and dive behind the corporate veil. [Harris, Hargovan and Adams, Australian Corporate Law, 2008, LexisNexis]. In what circumstances will the courts ignore the corporate veil? Illustrate your answer with reference to relevant court decisions. (c) The floating charge was invented by lawyers in the nineteenth century to enable manufacturing and trading companies to raise loan capital via debentures and offer security. Discuss the nature and practical utility of floating charges and the need for the creditor to ensure that the debtor company has registered the charge. (d) The joint venture is something other than a partnership. The activity of a joint venture is joint but little else is intended to be joint. Discuss at least 5 characteristics that differentiate a joint venture from a partnership.
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QUESTION 3 (15 Marks)


Indigo Pty Ltd, a company conducting business in the printing industry, was formed in 1994 by Mr and Mrs Blue. They were appointed as directors. The company employed an accountant. The companys financial records were kept on a computer, accessible to all directors, and maintained by the accountant each month. In October 2006, a third director was appointed to Indigo Pty Ltd. Green, the newly appointed director, previously worked as a consultant to the printing industry. Due to his strong marketing skills, Green was invited to become a non-executive director and chairperson of Indigo Pty Ltd. Green also has a strong background in operational management but has no experience in corporate financial management. Green accepted the invitation because Mr and Mrs Blue were friends in need of help with business marketing and also because by all appearances the business was thriving. Prior to accepting the appointment, Green met with the other two directors at a formal board meeting. The minutes of the board meeting records that the companys accountant was also in attendance and that the only item discussed related to the general performance of the printing industry in New South Wales. Within 12 months of Greens appointment as a director, Indigo Pty Ltd ceased trading in September 2007 with outstanding debts of $750,000 and appointed a voluntary administrator. The administrator was thereafter appointed as liquidator in October 2007. The liquidators Report produced a month by month analysis of the companys financial performance for the period September 2006 to September 2007. According to this information, Indigo Pty Ltd had significant cash flow difficulties during this entire period and was not making a profit. The liquidator, in taking legal action against all of the companys directors for insolvent trading, has successfully proved in court a breach of the requirements of s 588G of the Corporations Act. The evidence showed that Mrs Blue accepted her appointment as a director of Indigo Pty Ltd at her husbands request but was happy at all times to leave the management of the company to him. She trusted him. Furthermore, she did not believe that her participation was required, especially since the law changed in 1995 to permit single director companies. Each year Mrs Blue signed the companys annual returns declaring the company was solvent, but this document was not explained to her and she said: I would usually have a frying pan in one hand and be signing with the other. Green and Mrs Blue now seek to rely on a statutory defence in s 588H of the Corporations Act to defeat the liquidators claim for compensation payable to Indigo Pty Ltd: Green seeks to rely on the defence in s 588H(2); and Mrs Blue seeks to rely on the defence in s 588H(4).

With reference to the Corporations Act, relevant precedents and the facts above, advise: (a) Green and Mrs Blue, as directors of Indigo Pty Ltd, of their chances of success in avoiding personal liability under the particular defence they seek to rely on as identified above. (10 Marks) and (b) Discuss the relevance of the case Australian Securities and Investments Commission v Vizard [2005] FCA 1037 for company law. Your answer should also comment on the significance of the decision in Regal (Hastings) Ltd v Gulliver [1967] 2 AC 134 to the Vizard case. (5 Marks) ../please see over for Question 4

QUESTION 4

(15 Marks)

Ben, Mary and Liang are the company directors in QuickCo Pty Ltd (QuickCo), having founded the company several years ago. Lately, QuickCo has been experiencing unusual cash flow problems and may not be able to pay all of it's creditors their full entitlements. This is the first time in the company's history that the business' cash flow has not been sufficient to cover all liabilities. The directors of QuickCo believe that the company's position will improve as they are currently negotiating several large contracts that would hopefully bring in sufficient cash flow to satisfy all present liabilities. Ben, Mary and Liang are concerned about their future job prospects if the company becomes insolvent. CreditCo Pty Ltd (CreditCo) is a secured creditor of QuickCo with a 1st registered mortgage over QuickCo's office building (its most significant asset). CreditCo is concerned because QuickCo has not made its monthly loan repayments over the last 2 months. CreditCo is concerned about obtaining repayment of the debt, but does not want to pressure QuickCo as the company is its largest business customer. If QuickCo goes out of business, CreditCo will loose a substantial portion of its business. CreditCo is flexible about obtaining repayment of its debt. Ezifinance Pty Ltd (Ezifinance) is an unsecured creditor of QuickCo who also has not been paid for the last 2 months and is concerned about the repayment of its debt by QuickCo. QuickCo is Ezifinance's smallest client and the CEO of Ezifinance would like to clear the debt off the company's books sooner rather than later. Advise each of the following parties with reasons, and with reference to the relevant sections of the Corporations Act, as to which form of external administration would best suit their needs. (a) (b) (c) Ben, Mary and Liang CreditCo; and Ezifinance (5 marks) (5 marks) (5 marks)

Your answer should also consider whether the party you are advising is able to initiate the form of external administration you are advocating.

End of Paper

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