CASE STUDY 1
Jason, Bob and Derrick were all executive directors of an insurance company called Great-Makes Ltd. Derrick was the finance director and Bob was the Chief Executive Officer of the company. As well as being a director Jason also owned a substantial amount of shares in Great-Makes Ltd. Great-Makes Ltd was a publicly listed company on the ASX. Jason’s wife was a director and shareholder of another company called Pretty-Earnings Pty Ltd (PE). Jason requested from Bob and Derrick an advance of $10 million from Great-Makes Ltd to be paid to PE in return for $10 million worth of PE’s shares. Jason had a reputation as a finance guru and he told Bob and Derrick that he would use the money to buy sub-prime securities that were doing well in the U.S. His banker friends were making lots of money by trading these securities. He said that this would make the PE shares very valuable. PE had no other assets. Bob and Derrick also knew that Jason’s wife was a director and shareholder of PE and that there were no other assets in PE. As Bob and Derrick trusted Jason’s judgment they did not ask for any security. None of the other directors of Great-Makes Ltd knew of this advance. They also did not let the investment committee of the company know of the transfer of the funds.
The $10 million was spent in the following way:
- $5 million given to PE was used to buy the securities in the U.S,
- $3 million was used by Jason to buy more shares in Great-Makes Ltd to support its share price on the ASX, and
- The remaining $2 million was invested into other private companies where Jason and his family had an interest.
Jason thought he could make a quick profit as he had done in the past. He did not investigate any of these investments in any real way. Soon after this, the news from the US was filtering through that the U.S. securities were worthless and were causing the collapse of many U.S. companies. This made the PE shares now owned by Great-Makes Ltd worthless. The other directors of Great-Makes found out about the $10 million given to PE they were furious. They have reported the matter to ASIC and want ASIC to investigate Jason, Bob and Derrick for breaches of the Corporations Act.
- a) With reference to relevant legal principles use the IRAC legal problem-solving approach to advise the other directors of Great-Makes Ltd as to any breaches of directors’ duties under the Corporations Act 2001 (Cth) by Jason, Bob and Derrick and any defences that may be available. (30 marks)
- b) With reference to relevant legal principles use the IRAC legal problem-solving approach to advise as to any other breaches of the Corporations Act 2001 (Cth) relating to the use of the funds by Jason. (20 marks)
Total (50 marks)
CASE STUDY 2
It is now one year since you gave advice to Jon Fly Travels Ltd Pty Ltd (‘Jon Fly’). The company has been running a travel agency business. The Cook family held all the shares in the company and several of the family members were directors. The company has not been doing very well for the last year as there has been fierce competition in the travel agency market. Despite this the board of directors kept on allowing the purchase of more company branded promotional items to be given as gifts to their current and prospective customers. The last few orders could not be paid when the time for payment was due. At the time when Jon Fly was in this financially precarious position, the company granted a 6-year lease of the premises it owned at a fixed rent that was substantially below current market value, to two of its directors. The lease contract included an option in favour of the tenants (directors) to buy the premises again at a fixed sum that was substantially lower than the market value. The granting of the lease together with the option was authorized at a general meeting of the shareholders of the company. Five months after the lease was granted the company has now gone into liquidation. The creditors are very upset as they believe the lease should not have been granted and they want to take action against Jon Fly Travels Ltd.
With reference to relevant legal principles use the IRAC legal problem-solving approach to advise if the directors breached any of their duties owed to the company? If so, discuss the defences (if any) that may be available to them.