LOBO Company Law Questions (for use in
class in Cairns weeks 4 to 6) 2019
1. Companies may be either public or proprietary companies. Public companies
may be one of four classes; proprietary companies, any of two classes.
What form would you suggest for each of the following and why?
(a)
The Bohle Lawn Tennis Club wishes to incorporate. The club owns
courts and a clubhouse and the club bank account stands at $8,427.14;
(b)
As for a. above, however, the committee wishes to construct major
extensions to the clubhouse;
(c)
Joan and Bruce seek the protection of limited liability for their nursery
business;
(d)
Frederick and Harold wish to raise additional capital to develop a means
of transporting ore from their titanium mine to a storage site;
(e)
The firms of ABC Constructions and DEF Constructions intend to
amalgamate. The present partners envisage further expansion and the
absorption of other construction firms;
1
2. Bondy, Johnboy and Skasey are in partnership operating a department store
in the city. The store is profitable and Skasey is concerned about the amount
of tax he is paying. He has consulted an accountant who has suggested the
following options to him:
1. That the partnership transfer its business to a limited public company with
Bondy, Johnboy and Skasey and their families as shareholders and
Bondy, Johnboy and Skasey as directors; or
2. That the partnership transfer its business to a limited proprietary company
with Bondy, Johnboy and Skasey and their families as shareholders and
Skasey as director; or
3. That the partnership transfer its business to an unlimited company with
Bondy, Johnboy and Skasey and their families as shareholders and Bondy,
Johnboy and Skasey as directors; or
4. That the partnership transfer its business to a public company limited by
guarantee with Bondy, Johnboy and Skasey as guarantors and directors.
Bondy comes to you for advice on these options compared to the current
partnership structure (ignoring the tax implications). He particularly wants to
know about:
(a)
his legal relationship to the various entities;
(b)
his obligations and liabilities;
(c)
how he would go about selling his interest in the business in
the future (ie what would he be selling);
(d)
what formalities would be involved including the need to
disclose audited financial statements;
(e)
whether the arrangements will accommodate the raising of
capital to fund a renovation; and
(f)
what would happen to his interest should he pass away.
2
3.
Read the article below and consider the following questions: What is the
rationale behind permitting shareholders limited liability and can this rationale
be extended to one person or closely held companies? What are the means
available to creditors to protect their interests when dealing with limited
liability companies?
Consumer lawyers have called for an end to limited liability companies, after
asbestos products maker James Hardie Industries claimed it was no longer
financially responsible for asbestos-related compensation claims.
The Australian Plaintiff Lawyers Association (APLA) -- many of whose members
represent victims of asbestos disease -- has also called for a review of the
circumstances in which companies could use the protection of limited liability to
avoid providing for its future liabilities.
Asbestosis sufferers and unions have urged James Hardie to top up a fund it
established to cover asbestos-related compensation claims, following warnings the
fund could run out of money within five years.
APLA president John Gordon said today provisions for 'pty ltd' companies were
meant to be "a device for people of enterprise to try new ideas without risking
everything".
"It was never meant to be for companies like Hardies who cynically make their
millions and then seek to avoid the consequences of their actions by tipping a
pittance into an entity and saying 'sorry that's all there is' and sneaking out of the
country," Mr Gordon said.
"The corporations law should be overhauled so that in circumstances like this,
liability follows the controlling entity."If such outrageous examples like this continue,
it may be time to bring an end to the device. "Corporate Australia will have James
Hardie to thank if that happens."
Gordon called for an immediate injection of funds by Hardie into the corporation that
pays its asbestos claims. "Over the past 12 months a lot of politicians have been
calling on injured people to take responsibility for their own actions and have been
changing the law to force them to do so. What about corporate personal
responsibility for the injuries and death caused in the pursuit of profit?
"Let us be consistent in our demands for facing up to the consequences of actions.
Hardie's responsibility is to ensure that those who will suffer, and the families they
leave behind are properly compensated. Governments should ensure they face up
to that responsibility."
3
4. As a sole proprietor, Seymour conducted a highly lucrative business making
and delivering pizzas to the affluent residential areas abutting a university.
In June, Seymour sold his business to Talbot for an exorbitant sum. A clause
in their agreement stipulated that for two years after the sale Seymour would
not conduct a similar business within five kilometres of the business premises.
In July, in the name of Better Pizzas Pty Ltd, a company proposed to be
incorporated, Seymour leased premises next door to Talbot from Lance.
In August, Better Pizzas Pty Ltd was incorporated with Seymour employed as
Managing Director. Seymour was the sole shareholder in the company.
From the premises leased from Lance, the company conducted a pizza
delivery business in direct competition with Talbot.
Seymour has now received claims against him personally, from Talbot,
demanding that he discontinue the pizza operations of Better Pizzas Pty. Ltd.,
from Lance demanding unpaid rent and from local suppliers seeking payment
for ingredients supplied to Better Pizzas Pty. Ltd.
Advise Seymour.
5. Builders Ltd is a company involved in the building industry. With the downturn
in demand for homes in Townsville, the directors decide that the company
should construct holiday bungalows at Mission Beach.
The directors are of the opinion that the venture is rather risky and decide to
operate through the medium of a subsidiary company and for this purpose they
incorporate Constructit Ltd with an issued capital of 250 fifty cent shares.
Builders Ltd own 246 shares and each of the four directors of Builders Ltd own
1 share. The directors of Constructit Ltd are the same directors as for Builders
Ltd, but a manager is appointed to oversee the operations of the new
company. He occupies an office in the Builders Ltd company building and is
answerable to the managing director of Builders Ltd.
Land is bought with funds supplied by Builders Ltd on first mortgage and work
commences. Materials used are obtained through trade credit. Liquid funds
are supplied by Builders Ltd by way of an interest free loan.
It soon becomes obvious that the venture cannot succeed and the directors of
Builders Ltd petition for the winding up of Constructit Ltd to recoup their
investment. It also becomes obvious that only Builders Ltd will be repaid.
Mary is owed $7,000 for materials supplied to Constructit Ltd and wants to
know whether she has any chance of full or partial recovery. Advise her.
4
6. First-Timer, who has never had anything to do with shares, has recently
inherited 10,000 redeemable preference shares and 5,000 debentures in
Capital Ltd. Yesterday he received notification from the company of his
entitlement to subscribe for a further 2,000 shares under a 1 for 5
non-renounceable rights issue. The shares were to be issued at $1.25.
First-Timer has absolutely no idea what this means, wants to know what he
should do and what rights, if any, his existing shares and debentures confer
upon him and what advantage he would gain by investing further.
Starting from the very basics, advise him.
7. Take the facts of Q.6. First-Timer's shares were paid up to 25c. The company
has made a call of 10c a share. First-Timer realizes they want $1,000 from
him and is perturbed. He doesn't understand what is going on, wants to know
whether he has to pay and what will happen if he does not. Advise him.
(Assume that the company has no Constitution and the replaceable rules
apply.)
Would your answer be different if the company was designated Capital N.L?
8. In June a prospectus was issued, the object of which was to obtain
subscriptions for shares in Blue Sky Mines NL. The promoters indicated that
moneys raised would be put towards the further exploration and development
of various promising tantalum prospects over which the company held options.
The prospectus contained a copy of a report from Shallow, a consulting
geologist, stating that nothing had come to the attention of the geologist to
suggest that the company’s statement “that the proposed lease areas were
rich with tantalum, with proven and probable reserves of 40 million tonnes
graded at in excess of 100 grams to the tonne” was incorrect.
The prospectus was duly lodged with the Commission and copies were
distributed to the public. Tyron, in reliance upon the material contained in the
prospectus subscribed for and was allotted 10,000 shares.
Recent reports of drilling show that the mineral deposits were superficial only
and that this fact should have been obvious to even a novice. The shares are
worthless and Tyron seeks your advice as to his chances of successfully suing
the company, the promoters, or Shallow.
Include in your answer any defences that may be open to those parties or any
of them.
5
9.
Harry was appointed under a service contract as managing director for five
years. The contract was stated to be subject to the Constitution.
The Constitution stated that directors could be removed by special resolution,
however, subject to the provisions of any service agreement. A special
resolution was passed and Harry was dismissed with three years left to run.
Harry now seeks your advice as to whether he can enforce the service
agreement.
10.
George, Tony and John are the only shareholders and directors in a
manufacturing business called “Canit Pty Ltd”. George owns 80% of the
shares and both Tony and John hold 10% each. George also holds the
position of Managing Director of Canit Pty Ltd.
George is ambitious and decides to put his long-held vision of holding 100%
of the shares in the company into action. He wants to change the constitution
to allow a shareholder holding 35% or more of the issued share capital of
Canit Pty Ltd to acquire the shares of a shareholder holding less than 15% of
the issued share capital, at “fair market price”.
(a)
Advise George as to what procedural steps must be followed to validly
alter the constitution.
(b)
Tony and John are concerned that George will apply the necessary
procedures required to alter the constitution. Advise Tony and John whether
there are any other grounds upon which they may challenge the compulsory
acquisition of their shares.
(c)
If Tony sold George his 10% so that George held 90% of the issued
share capital would he need to change the constitution to acquire the rest of
the shares? Discuss.
11.
John is a shareholder in the Tully Sugar Mill Ltd. He is also the joint-owner
of a local store in the main street of Tully. The Board of TSM is considering
building a shopping centre outside the town which will damage John’s
business.
Advise John
6
12.
John invests in a company which is in the retail industry. The Board of
Directors engage in speculation on the money market and the company
suffers losses. John is not happy and seeks your advice.
Peter was a counter party to one of the money market transactions and the
company has now told him that it does not intend to honour the contract.
Advise Peter.
At a General Meeting of the company a proposal is put to cease the money
market dealings. John votes in favour but the chairman refuses to count his
vote. Advise John.
13.
John is a director of LKM Ltd. He has a falling out with the other directors
and they call an EGM for one month’s time at which they propose an
(ordinary) resolution to remove John. The Constitution of the company
provides that any directors the subject of a removal resolution must be given
one month’s notice. John is given this notice. Can John contest the legality
of the motion?
Would it make any difference if the company was LKM Pty Ltd?
7