LEGAL PROFESSION ADMISSION BOARD
MARCH 2010
LAW OF ASSOCIATIONS
Time: Three Hours
This paper consists of seven questions.
Candidates are required to attempt any five questions.
No question is compulsory.
All questions are of equal value.
If a candidate answers more than the specified number of
questions, only the first five questions attempted will be
marked.
All questions may be answered in one examination
booklet.
Each page of each answer must be numbered with the
appropriate question number.
Candidates must indicate which questions they have
answered on the front cover of the first examination
booklet.
Candidates must write their answers clearly. Lack of
legibility may lead to a delay in the candidate’s results
being given.
Permitted Materials:
This is an open book exam. Candidates may refer to
any books and any printed or handwritten material
they have brought into the examination room.
As some instances of cheating and of bringing unauthorised material into the
examination room have come to the attention of the Admission Board,
candidates are warned that such conduct will result in instant expulsion from
the examination and may result in exclusion from all further examinations.
This examination should not be relied on as a guide to the form or content of future
examinations in this subject.
©2010 Legal Profession Admission Board
Question 1
Stephen, Maria and Sam shared an interest in botany. In January 2009 they decided
to see whether other people shared a similar interest and, to this end, they placed an
advertisement in the local newspaper advertising the formation of an association
designed to enhance the study of botany and to assist with the development of new
species of plants. In the advertisement it was revealed that a meeting would be held
in the local hall on 15 January 2009 at which those interested were invited to attend.
On 15 January 2009 some 300 people attended the meeting at the local hall. Each of
the attendees professed a profound interest in the study of botany. Some even
brought samples of plants from their private collections. Stephen, Maria and Sam
were overwhelmed by the response.
At the meeting Stephen, Maria and Sam informed the attendees that they would be
forming an association and that they were prepared to be committee members at
least for the first year. They also advised the meeting that the association was to be
called the Local Botany Association and that they were now calling for members. By
a show of hands amongst the attendees, Stephen, Maria and Sam were elected
unopposed as committee members for a 12 month period. They were also
authorised by the attendees to prepare some rules to regulate the association. It was
further agreed by the attendees that there would be one meeting on the last Tuesday
of each month.
Over the next two weeks Stephen, Maria and Sam drafted a set of rules for the
association. Those rules included a clause requiring members to indemnify
committee members in the event that the committee members were sued in their
capacity as committee members. At the meeting in February 2009 copies of the rules
of the association were distributed to members. Further, at the same meeting, it was
resolved by the members that the association would provide advisory services to the
administrators of the local botanical gardens in consequence of a request that had
been made by those administrators for such services.
In June 2009 Stephen, Maria and Sam, on behalf of the association, engaged Tom,
a well-known botanist as a consultant to the association. Shortly thereafter Tom was
sent to the local botanical gardens to advise on the condition and future maintenance
of historical fig trees which had been growing in the gardens for over 100 years. It
was expected that this task would take two weeks. After examining the fig trees, Tom
recommended that a particular fertiliser be applied around the base of each of the
trees. This recommendation was adopted by the administrators of the local botanical
gardens and the fertiliser was applied.
By September 2009 several of the fig trees in the local botanical gardens had died.
In consequence, the administrators called in an international expert to report on the
probable cause. Subsequently the international expert advised that the particular
fertiliser which had been applied was harmful to fig trees and should never have
been so applied.
(Question 1 continues)
(Question 1 continued)
In November 2009 the administrators of the local botanical gardens
commenced legal proceedings for negligence against the Local Botany
Association and against Stephen, Maria and Sam. You are required to advise
the administrators as to their prospects of success in the litigation against
each of those defendants. Further, you are required to advise whether
Stephen, Maria and Sam are able to enforce the indemnity provision that is
contained in the rules of the association. You should use case authorities to
support your answer.
(20 marks)
Question 2
Grim Financial Services Pty Ltd (in liq) (the “company”) was formed in July 2007 by
Mr Jamieson and Mr Jones. The company provided financial advisory services to
clients. At the time of the company’s incorporation, Mr Jamieson and Mr Jones were
the company's directors, however, in August 2009, Mr Jones resigned as a director
and was replaced by Mr Foo.
In May 2008 the company borrowed $500,000 from the local bank. The amount of
that loan was unsecured. In September 2009 the company borrowed a further
$500,000 from the local bank. This loan was also unsecured. Neither of the two
loans were repaid by the company and the funds were expended in the normal
course of the company's business.
In February 2010 the company was wound up upon the application of the local bank.
As at the time of winding up, Mr Jamieson and Mr Foo were the company’s sole
directors. There were insufficient assets available to repay the company’s debt to the
local bank.
The liquidator of the company now seeks to recover from Mr Jamieson and Mr Foo
an amount equivalent to the amount outstanding to the local bank on the basis that,
according to the liquidator, at the time the loans were entered into by the company,
the company was insolvent or became insolvent in consequence of incurring those
loans.
You are required to advise whether Mr Jamieson and Mr Foo (or indeed
anyone else) will be liable to compensate the company for any amount should
the liquidator bring proceedings. Your response should include an analysis of
the essential elements that are necessary to be shown for the liquidator to be
successful and an analysis of any statutory defence that the directors may
have to any such application.
(20 marks)
(Question 3 follows)
Question 3
Data Holdings Australia Pty Ltd (the “company”) is a company which offers
electronic data storage facilities to its clients for a fee. The company was
incorporated in 2005 and at all times its directors were Matt, Luke and John. Further,
Matt, Luke and John each owned beneficially 10000 ordinary shares in the company.
In the period 2005 to April 2009 the company regularly paid dividends to Matt, Luke
and John.
From June 2009 the company ceased to hold any shareholders’ meetings and
directors’ meetings despite John requesting such meetings to be held pursuant to
the company constitution. Despite these requests Matt and Luke have refused to
attend or convene meetings of any type and have also refused to discuss with John
matters of management of the company. Further, dividends no longer are paid
despite the company making a profit and all decisions of the company have been
made since that time by Matt and Luke without informing John. Finally, Matt and
Luke have given themselves an increase in salary. John, who also received a salary,
was not given an increase. Matt and Luke increased their salary to take up the profits
made by the company in any year.
John seeks your advice as to whether he may have any personal rights against
Matt and Luke.
(20 marks)
Question 4
Milly and Tony are shareholders in Wallgrove Furniture Pty Ltd (the “company”), a
furniture manufacturing company in the Blue Mountains. The other shareholders in
the company are Steve, Oliver and Randall. Each shareholder holds one ordinary
share in the company. The directors of the company are Oliver and Randall and
company secretary is Steve.
In October 2009 Steve, Oliver and Randall established a company called Furniture
Made to Order Pty Ltd. That company also manufactured furniture.
In a period November 2009 to January 2010 Steve received numerous furniture
orders from customers. In many cases Steve forwarded those orders onto Oliver and
Randall who then filled them on behalf of Furniture Made to Order Pty Ltd resulting in
profit to that company. Further, in those cases, the company received no financial
benefit from the respective transactions.
Millie and Tony were previously unaware that such business had been passed onto
Furniture Made to Order Pty Ltd.
Millie and Tony now seek your advice as to whether they may bring
proceedings on behalf of the company in consequence of the above events. In
your response you should refer to the procedure involved and to the criteria
that needs to be satisfied in order to bring those proceedings. Reference to
case authorities needs to be made.
(20 marks)
(Question 5 follows)
Question 5
Mr and Mrs Branson were the directors and only shareholders of Branson Property
Investments Pty Ltd ("Branson Property Investments"). Mr Branson was the
managing director and had the de facto control of the conduct of Branson Property
Investment’s business. Branson Property Investments had one major asset, that
being a factory at Kurnell (the “Property”) which was leased to an engineering firm
for a period of five years.
Subsequently, Mr Branson arranged a loan to himself from the Progressive Lending
Bank (the "Bank"). As security for the loan, the Bank required a mortgage over the
Property. In his discussions with the Bank, Mr Branson indicated that the loan was
for investment purposes. The Bank did not know or make inquiries as to the
connection between the loan and the business carried on by Branson Property
Investments and the loan proceeds were made payable to Mr. Branson directly.
The mortgage documents that were prepared by the Bank were executed in two
different places by Mr Branson who purported to act on behalf of Branson Property
Investments. On page four of the mortgage document the common seal of Branson
Property Investments was affixed together with the signature of Mr Branson and the
forged signature of Mrs Branson. Mr Branson forged that signature. In addition, the
signatures were not accompanied by any description of each person's role in
Branson Property Investments. On page six of the mortgage document Mrs
Branson's signature was again forged by Mr Branson and the word "secretary" was
added under this forged signature. Searches conducted by the Bank had indicated
that Mr and Mrs Branson were both directors of Branson Property Investments
however the same records show that Mrs Branson was not recorded as the
secretary of Branson Property Investments.
The loan funds were subsequently released directly to Mr Branson who used them
for personal affairs. After default under the mortgage, the Bank sought possession of
the Property. Mrs Branson argued that the Bank should not have released the
money directly to her husband and that as her signature on the mortgage was a
forgery and as she was not the secretary of Branson Property Investments, the
mortgage was void and unenforceable.
Advise Mrs Branson of the merits of those arguments.
(20 marks)
(Question 6 follows)
Question 6
Keith and Sharon carried on a sheep-breeding business in partnership on a property
known as "Wybung". They entered into a written agreement with the Local Produce
Store ("the Store") under which the Store agreed to lend them $150,000.00 for the
purposes of the partnership business. The lending agreement provided that:
(a) The loan was to be repaid in a lump sum on demand by the Store;
(b) During the currency of the loan the profits of the sheep-breeding business
were to be divided equally between Keith, Sharon and the Store;
(c) The Store had a right to inspect the partnership's financial records;
(d) Keith and Sharon were restricted from purchasing any equipment for the
business over $5000 without the consent of the Store;
(e) The advance by the Store was expressed to be by way of a loan;
(f)
The three parties were not to be regarded as being in partnership with each
other.
Keith and Sharon, without the Store's consent, contracted to purchase a wool press
and drenching equipment from the Sheep-Breeder's Supply Centre (the "Supply
Centre") on credit at a price of $50,000.00. The Supply Centre believed Keith and
Sharon were partners in the sheep-breeding business, but knew nothing of the
Store’s involvement in that business.
Subsequently a fire on "Wybung" destroyed most of the buildings and contents,
including the wool press and the drenching equipment that had been purchased from
the Supply Centre. The property was not insured. The Store has now demanded the
repayment of the loan and the Supply Centre has demanded payment for the wool
press and the drenching equipment. Keith and Sharon have no other assets.
Advise the parties.
(20 marks)
(Question 7 follows)
Question 7
Mitchell and Andrew are the two Directors of a company called Literature for
Children Pty Ltd, a company which publishes children’s books. Of the 6000 issued
shares in Literature for Children Pty Ltd, Mitchell and Andrew each hold 1,500 of the
company's shares whilst another 2,000 shares are held by Ace Publishing Ltd and
the remaining 1,000 shares are widely held.
The constitution of Literature for Children Pty Ltd empowers the Directors to issue
further shares without recourse to a general meeting of members. Relying on this
power, the Directors decided during a board meeting of the company to allot 2,000
shares in the company to World Children's Literature Ltd, a company which hitherto
had not held any shares in Literature for Children Pty Ltd. At that time, Mitchell and
Andrew were the major shareholders in World Children's Literature Ltd – a factor
they never disclosed to the shareholders of Literature for Children Pty Ltd.
Ace Publishing Ltd has now commenced proceedings in the Supreme Court of NSW
seeking declarations that Mitchell and Andrew have breached numerous duties owed
to Literature for Children Pty Ltd including their duty of care and diligence and their
duty to act honestly. They also allege there has been improper use of position, a
conflict of interest and that Mitchell and Andrew have not acted for a proper purpose.
As part of their claim Ace Publishing Ltd seeks to set aside the allotment of shares to
World Children's Literature Ltd.
Ace Publishing Ltd argues that the real purpose of the allotment was to prevent it
from obtaining control of Literature for Children Ltd. In reply, Mitchell and Andrew
assert that their decision to allot the shares was based upon the best interests of the
company and that the additional capital would give the company access to greater
funds. They also contend that they had an unfettered power to allot the shares in any
case.
Discuss the merits of these arguments. In your answer you should identify
whether there have been any breaches of duty by the directors and the
consequences for such breaches.
(20 marks)
END OF PAPER