Faculty of Business (incorporating the AGSM) School of Business Law & Taxation LEGT 2741 BUSINESS ENTITIES SESSION

N 1, 2007 FINAL EXAMINATION

Time Allowed: 3 hours Total Number of questions: 4 Answer all FOUR questions Each question is worth 15 marks
Students may bring into the examination room: Business Entities Case List Session 1, 2007 And (any unannotated edition of) The Australian Corporations Legislation (Butterworths) Or The Australian Corporations and Securities Legislation (CCH) Or Essential Corporations Legislation (LBC)

The Legislation and Case List may be underlined and/or highlighted but otherwise must be unmarked and untagged Each question must be answered in a separate book Answers must be written in ink Candidate may retain a copy of this paper

QUESTION 1

(15 Marks)

Frequently the courts have been requested to look behind the corporate veil in respect of companies associated as a group where to all outward appearances they seem to operate as a single entity. The Australian courts, more than their English counterparts, have been reluctant to depart from the separate legal entity where there is no legislation requiring them to do so.
[Lipton & Herzberg, Understanding Company Law, 12th ed, 2004, Thomson]

Do you agree with the above quote? Discuss fully with reference to Australian and English precedents. Your answer must also make reference to the decision in ACN 007 528 207 Pty Ltd (In Liq) v Bird Cameron [2005] SASC 204 (Bird Cameron case) and comment on its significance for this area of the law.

QUESTION 2 ANSWER ANY 3 PARTS OF THIS QUESTION (3 x 5 Marks)

(a) Incorporation, the most significant feature of any company, whether limited or unlimited, means that the law treats it as a type of legal person. By contrast, a partnership in Australia has no legal existence from the members of the partnership. Discuss at least five differences between a company and a partnership flowing from the partnerships lack of legal personality. (b) Explain the manner of appointment, role and duties of receivers when realising the security. The primary focus of the fundraising provisions is to ensure that investors in newly issued securities of a corporation, other than those who are in a strong enough position to look after themselves, have access to the information which a reasonable investor would require for the purpose of making an investment decision. Discuss, with reference to the Corporations Act 2001 (Cth), the various ways in which the interests of investors are protected during corporate fundraising. (d) By far the most revolutionary of these proposals for law reform (2006), as they affect directors, is the suggested extension of the business judgment rule. Discuss the significance, and the current operation, of the business judgment rule with reference to relevant precedents.

(c)

/please see over for Question 3

QUESTION 3

(15 Marks)

One Stop X-Ray Limited (X-Ray) is a company that was formed in 2004 to set up a number of facilities throughout the suburbs of Sydney to take X-Rays and conduct other medical imaging tests. The initial directors were Robert Silver (Silver) and two radiologists, Dr David OBrien (Dr OBrien) and Dr Susan Thompson (Dr Thompson). The initial shareholders were each of the directors and their respective spouses. Silver was employed full time as the managing director and Dr OBrien and Dr Thompson were nonexecutive directors. At the first board meeting in December 2004, Dr Thompson informed the other directors that she was very busy with her medical practice and could not be involved in the management of X-Ray or regularly attend board meetings. In fact she only attended one board meeting each year. In January and February 2005, X-Ray entered into leases for 5 premises throughout Sydney and by April 2005 the company was ready to fit out the premises with medical equipment. Dr OBrian was also a non-executive director of Arena Pty Limited (Arena), a manufacturer of medical imaging equipment. He suggested to Silver that X-Ray purchase all of its equipment from Arena, stating that he could get this at cheaper rates as he was a nonexecutive director. At a meeting of the board of X-Ray, attended only by Dr OBrien and Silver, a resolution was passed that X-Ray purchase all of its equipment from Arena. As a result of the sale to X-Ray, Dr OBrian received a commission of $50,000, which was discovered accidentally some months later by the board of directors. By November 2005 X-Ray was successfully operating from the 5 leased premises. In December 2005 Silver purchased a motor boat for $500,000. Although he paid the $50,000 deposit using his own funds, he drew a cheque from X-Rays bank account to pay the balance. He did not disclose this transaction to the board or the shareholders. In June 2006 the directors of X-Ray were approached by Gentech Limited (Gentech), a large listed company, who wanted to purchase the company. All of the shareholders agreed to sell their shares to Gentech and X-Ray subsequently becomes a wholly owned subsidiary of Gentech. Advise Gentech, with reference to relevant precedents, as to what legal action it could take against the former directors of X-Ray under: (a) (b) the common law; and the Corporations Act 2001 (Cth) (9 marks) (6 marks)

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QUESTION 4

(15 Marks)

Joe is the managing director of a medium sized Internet company, E-Site Pty Limited. E-Site Pty Limited is a family company owned by Joe and his two nephews, Dave and Mick. Dave and Mick are also directors of E-Site Pty Ltd but take no active part in the day to day management of the company. Over the last year, E-Site Pty Ltd has experienced several episodes of cash flow shortage in its business operations. These cash flow shortages are due to E-Site Pty Ltds contractual commitment to the companys supplier of internet access, who requires payment within seven days of the end of each month and purchasers (customers) of E-Site Pty Ltd services delaying payment for up to two months after being billed. Some of the customers claimed that E-Site Pty Ltd's web servers were crashing too often with the result that the customers web page was not accessible for up to two days at a time. Customers were either refusing to pay their bills when this occurred or demanding a reduction of the billed amount. To overcome the server crashing problem, Joe committed E-Site Pty Ltd to the purchase of one million dollars in new computer servers and external dial up modem equipment. This new equipment was paid for out of the accumulated profits of E-Site Pty Ltd. E-Site Pty Ltd had invested the accumulated profits in the short-term bond market. The investment in the new equipment had virtually depleted the accumulated profits and, in doing so, removed the company's only alternate source of income, which income E-Site Pty Ltd relied upon when cash flow was tight in the internet service business. Joe has just received a letter from the newly appointed liquidator of E-Site Pty Ltd's largest customer, Electronic Sales Limited, advising that it was highly unlikely that Electronic Sales Ltd would be able to pay E-Site Pty Ltd the $750,000 owed E-Site Pty Ltd for internet services provided. Joe immediately realised that a loss of this magnitude could very possibly mean that E-Site Pty Ltd may not be able to meet its current financial commitments. You may assume that Electronic Sales Ltd's liquidator is correct. The directors of E-Site Pty Limited wish to avoid an immediate winding up the company. (a) Advise the directors of E-Site Pty Limited of the most appropriate alternative to an immediate winding up of a company available under the Corporations Act (Cth). Discuss the procedure involved in the most appropriate alternative you identified and, supported with reasons, the most probable outcome. (10 Marks) and Advise the directors of E-Site Pty Limited of the comparative utility of the most appropriate alternative you identified in part (a). (5 Marks)

(b)

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