FINAL EXAMINATION

SPRING SESSION 2008

SCHOOL OF LAW
Student Family Name:
Student Given Names:
Student Number:
Course:
Unit Name (In Full):

LAW OF BUSINESS ORGANISATIONS

Unit Number:

200183

Time Allowed:

3 (THREE) HOURS plus 10 (TEN) minutes reading time.

Number of Questions:

3 (THREE)

Total Number of Pages: 4 (FOUR)

Lecturer's Name:

DR MASUDUL HAQUE, MARGARET HYLAND

INSTRUCTIONS
PLEASE READ CAREFULLY BEFORE PROCEEDING
1

Write your name and student number on the top of this examination paper and on ALL answer booklets.

This is an OPEN book examination. You can only use your prescribed text book and the Corporations
Act 2001. No other materials are allowed.

The examination is out of 100. You must answer all 3 (three) questions and their parts. Marks are
indicated for each question.

Answer each question in a separate answer booklet.

DO NOT TAKE THIS PAPER FROM THE EXAMINATION ROOM

Answer all parts of all 3(three) questions. You must refer to statute and decided
cases (as applicable) to support your arguments.
Question 1 (55 marks)
Jack, Tom and Mary are executive directors of Photolab Ltd. Jack owns 8% of the shares,
Tom 15% and Mary 7%. 15% of the shares are owned by 700 shareholders and the
remaining 55% shares are owned by Photoproductions Ltd. Although Tom has never been
formally appointed as managing director of the company, he has assumed that role and the
other directors allow him to do so. The Board was aware that Toms business card
described him as the managing director of Photolab Ltd. Often Tom entered into contracts
on behalf of the company binding the company up to $1 million dollars without seeking the
prior approval of the board. The company, however, always honoured these contracts.
Photolab Ltd is a subsidiary of Photoproductions Ltd. Tom is also a director of
Photoproductions Ltd. On 5 April 2001, Tom entered into negotiations with
Photoproductions Ltd, whereby it was agreed that Photolab Ltd would lend
Photoproductions Ltd $1 million dollars interest free payable within three years. No security
was taken with respect to this loan. Tom signed the loan contract as managing director on
behalf of Photolab Ltd.
On 8 October 2002, Tom, believing that commercial rents were going to double in the next
few months, renegotiated a 5 year lease over the premises the company was currently
renting. In reaching this decision, Tom did not consult anyone nor did he read any relevant
material to help him make an informed decision. Unfortunately, there was a downward trend
in rentals and by December 2003, commercial rents had fallen by 10 % and were estimated
to continue to fall by a further 10% over the next few months. When the board realized it
questioned why he had done this, Tom said he just though it was the best thing to do, as he
had a feeling rents were going to rise. The Board issued him with very specific directions
that he was not to enter into any further contracts without first consulting them.
At a Board meeting in March 2004, the directors were becoming concerned about the
companys financial stability. It had lost one of its major clients to a competitor and they
were worried that some of their other clients may follow. Mary suggested that perhaps an
administrator should be appointed to provide an independent view of the companys
financial affairs. However, the Board voted against this arguing that the company had just
been audited by Fred Smart, whose report had verified that Photolab Ltd was in a sound
financial position.
Tom believed that for PhotLab to maintain a competitive market edge, it needed to invest in
some of the newly available technology. In September 2003, he convinced the company to
purchase a new developer for $180,000 to be paid by 4 equal payments over one year. On
4 April 2004, the company defaulted under the payment schedule. It appeared that the
company was insolvent.
A)

Was the contract made between Photoproductions Ltd and Tom, binding on
Photolab Ltd? ( 6 marks)

B)

Has Tom breached any of his duty as a director by entering into the loan
contract with Photoproductions Ltd and/or the 5 year commercial lease? (8
marks).

C)

If Tom has breached any of his directors duty what actions can be taken against
him and by whom? (6 marks)

D)

Can a shareholder bring a personal action, and against whom the company or the
director- based on the facts of the question? Do you think there are grounds for a
shareholder to bring derivative action? What remedies can be obtained both for
personal and derivative action? (6+6+3=15 marks)

E)

Does the agreement between Photolab Ltd and Photoproduction Ltd require the
approval of shareholders? If so, why? (8 Marks)

F)

If Photolab Ltd become insolvent because of the loan provided to Photoproductions

Ltd, what liability, if any, have the directors for the companys debts? Who can bring
the action and what remedies are available? (7+5=12 marks)

Question 2 [15 MARKS]

In the above question [question 1] Fred Smart was the auditor of Photolab Ltd. Fred Smarts
wife owns 10% of the shares in Photolab Ltd. When Fred is conducting the audit he is
concerned about the companys accounts, in that the company has not kept proper financial
records. He also cannot find any evidence that the company has maintained a register of its
members or its charges. Tom tells him he will find them and give them to him but never
does. The company tells Fred Smart that it intends to show his report to BigBank, as they
wish to borrow $100,000 for expansion purposes. The company tells Fred that BigBank will
not provide the loan, unless his report indicates that Photolab Ltd is financially stable. Fred
provides the required report stating that in his opinion the companys financial position is
quite solid. On the basis of this, Bigbank lends Photolab Ltd the $100,000. Six months later,
Photlab Ltd goes into liquidation.
i.

Discuss whether Fred Smart has breached his statutory or common law duties. (7.5
Marks)

ii.

Has BigBank any right of action against Fred Smart? Provide reasons and support
for your answer. (7.5 Marks)

Question 3 [30 MARKS]

A.

How a company can amend its constitution? Mention 3 statutory provisions imposing
restriction/limitation on the ability of the company to modify or repeal its constitution by
following procedure laid by s136(2). (2+3=5 marks)

B.

What is a Proprietary company? How would you distinguish between small and large
proprietary company? (2+3=5Marks)
3

C.

Why all companies do not follow replaceable rules? What prejudice is likely to be
suffered by third parties if a company does engage in activities not permitted by its
objects?(2+3=5)

D.

What prejudice is likely to be suffered by third parties if a company does engage in

activities not permitted by its objects?
[3 marks]

E.

What is a Proprietary company? How would you distinguish between small and
large proprietary company? (2+3=5Marks)

F.

Chen is an accountant and he is skilled in preparing budgets and cash flow statements
for new businesses. He is hired by four former University friends to prepare budgets
and cash flows for a new company that is to be set up by these four friends. Chen
goes to the printer and orders stationery for the new company and signs on behalf of
the would be incorporated company. The new company, Comrades Pty Ltd, is formed,
but it does not pay for the stationery ordered by Chen.
Who is liable to pay for the stationery? (7 marks)
END OF EXAMINATION PAPER