Assignment BULAW2611 Organisations LawSemester 2, 2012School of BusinessPurposeTo enable you to...

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Assignment BULAW2611 Organisations LawSemester 2, 2012School of BusinessPurposeTo enable you to apply problem solving skills and to research duties of directors, and consider a company’s relations with outsiders. You do not need to refer to academic journal articles in this assignment, as indicated in the Course Description, but may choose to do so.The Assignment will be marked out of 30 and is worth 30% of your total mark for the BULAW2611 course.It is important for you to have time to think through how to structure and present arguments, and to review and discuss what the law is in a particular area. Whilst discussion with others is encouraged, the final piece of work must be your own.Word Limit2,300-2,500 in total (assignments exceeding the word limit may not be marked and may be returned to the student for re-writing; assignments less than the required length will risk not covering the topic adequately and may result in a fail). Do not include synopsis, references or bibliography in the word count. Note: All University of Ballarat rules relating to referencing, citation and acknowledgement must be complied with.Due DatePlease see your lecturer, and refer to the Course Description, for due date and submission arrangements.RequiredRead the Fact Situation and complete the tasks in Part A (20 marks) and Part B (10 marks).Support your answer with reference to relevant cases and legislation.Fact SituationFree Spirit Pty Ltd organises ‘team building’ professional development short courses in various locations around Australia. It specialises in weekend retreats that involve adventure activities that build team spirit. Many businesses pay $1,000 for each of their employees to attend a Free Spirit weekend retreat.There are three directors of Free Spirit: Yana (Managing Director), Su (Financial Director) and William (a non-executive Director). When they started the company in February 2005 they sought advice from an accountant friend of theirs, who suggested that no director should have the capacity to bind the company to contracts worth more than $50,000. This limitation was written into the company’s Constitution.Yana and Su control the business, and William, who is Yana’s boyfriend, has little interest in the company and little knowledge about its affairs.Each of the three directors hold 20% of the shares of the company, and there are several non-director shareholders.Yana, Su and William regularly hold directors’ board meetings. During a meeting in July 2011 the directors considered the following proposals:  	That the company should enter into a contract to purchase adventure equipment imported by Sporting Edge Pty Ltd, a company wholly owned and controlled by Yana and Su. Sporting Edge Pty Ltd is proposing to charge twice the price for adventure equipment compared with Free Spirit’s current supplier. 	That the company should expand into Alaska. Yana and Su believe Alaska is a great market as there are no businesses offering team building professional development courses in Alaska yet. Neither Yana nor Su provide any financial forecasts or legal information about the proposed expansion into Alaska.  All three directors vote in favour of the above proposals. William is wary about both proposals, but a stern look across the board room from Yana silences him, and he votes in favour of the proposals.William becomes unhappy because of his passive role in the business. William decides to show how useful he is to the company, and while Yana and Su are on a business trip to Alaska, he approaches Your Bank Ltd for a loan of $500,000 to finance Free Spirit’s expansion into Alaska. William knows the bank staff because he has occasionally deposited Free Spirit’s weekly takings into the company’s account.William signs a loan agreement with Your Bank Ltd, signing his name next to the words ‘director of Free Spirit, for and on behalf of Free Spirit’. When the bank’s accountant asked for another director to sign the agreement as well, William explained that this was not possible as both Yana and Su were unavailable, could not be contacted because they are in a remote location, and said ‘financing the expansion into Alaska is urgent’.The bank’s lending officer was reluctant to approve the loan as it was a large sum for Free Spirit but William convinced him it would be OK.Unfortunately, the directors of Free Spirit soon find out that Alaska’s government imposes heavy legal restrictions on companies operating adventure activities and Free Spirit cannot obtain the necessary government approvals to operate in Alaska. As a result, the proposed expansion into Alaska will not be able to proceed.Because of this, and because Free Spirit is now paying to Sporting Edge Pty Ltd twice the price for adventure equipment, the company’s financial situation deteriorates and it can no longer meet its repayment obligations to Your Bank. At a directors’ meeting, it is decided that Free Spirit would argue that the loan contract to Your Bank was not valid as William had no authority to make it.Part A XXXXXXXXXXmarks)Task: Discuss whether any of the directors of Free Spirit Pty Ltd are in breach of any of their directors’ duties.Hints   	Consider each director separately. 	Identify relevant sections of the Corporations Act 2001 (Cth) and apply these to the facts. 	Identify and discuss at least two relevant cases. 	Consider whether there are any defences available to any of the directors.  Part B XXXXXXXXXXmarks)Task:  Discuss whether Free Spirit Pty Ltd is bound to the loan contract with Your Bank Ltd.Hints   	Discuss companies’ relations with outsiders, do NOT discuss directors’ duties in Part B 	Identify relevant sections of the Corporations Act 2001 (Cth) and apply these to the facts. 	Identify and discuss at least two relevant cases.

David · Accepted Answer

Part A 
Issue: 
Whether any of the directors of Free Spirit Pty Ltd are in breach of any of their director’s 
duties? 
Law: 
The law applicable to the case in hand is the common law rule in Australia relating to the 
duties of directors and also the relevant provisions relating to the duties of directors under the 
Corporations Act 2001. 
Sec 180 of the Corporations Act requires a director or officer of a corporation to exercise 
their powers and discharge their duties with the same degree of care and diligence which a 
reasonable person would exercise in a similar position. 
Further, the section says that the director or officer of the corporation, who makes a business 
judgement in respect of the operations of the business, is said to have exercised due care and 
diligence if he makes the judgement in good faith for a proper purpose. Also, such a business 
judgement is said to have been made with care and diligence if the director or officer do not 
have a material personal interest in the subject matter of the judgement and where they 
believe the judgement to be in the best interests of the corporation. 
Sec 181 of the Corporations Act says that directors and other officers have a civil obligation 
to exercise their powers and discharge their duties in good faith in the best interests of the 
company and for a proper purpose.( CCH Australia,2011) 
Sec 182 of the Corporations Act requires that a director or an officer of the company must not 
use their position to cause detriment to the company.  
Sec 183 of the Corporations Act requires that a director or officer of a company must not 
improperly use any information that they have acquired in their capacity as such director or 
officer in a manner that it causes detriment to the company.(CCH Australia, 2011) 
Sec 588 G deals with the director’s duty to prevent insolvent trading by a corporation. As per 
the section, a person who is a director, is said to have committed an offence if the company 
has incurred a debt at a time when he is the director and the company is insolvent or becomes 
insolvent by incurring that debt; and the person suspected or there were reasonable grounds to 
suspect that the company was insolvent or would become insolvent as a result of incurring 
that debt or other debts. 
Re case law Howard Smith Ltd v Ampol Petroleum Ltd, wherein it was held that if the 
directors take an action based on their self-interest, it cannot be said to have been taken for a 
proper purpose. (Cassidy,2005) 
Re case law ASIC v Parker, whereby ASIC had sought for a disqualification honour against 
the directors of the company for breach of their statutory duties to exercise due care and 
diligence in respect of a decision to make loans without adequate investigation as to the 
financial position of the borrower of the loan.(Cassidy,2005) 
Application: 
As per the facts of the case, Free Spirit Pty Ltd is a company which specializes in weekend 
retreats involving adventure activities that build team spirit, as part of its ‘team building’  
professional development short courses in various locations around Australia. The company 
three directors Yana, managing director, Su, financial director, and William, a non-executive 
director; and each one of them has the power as per the company’s Constitution to bind the 
company to contracts worth up to $50000. Yana and Su are mainly responsible for 
controlling the business, and William, who is also Yana’s boyfriend, has little interest and 
little knowledge about the affairs of the company. During the board meeting in July 2011, it 
was proposed to purchase adventure equipment at double the usual price from another 
company, Sporting Edge Pty Ltd owned by Yana and Su. It was also proposed to expand into 
Alaska as Yana and Su believe it to be a great market for their courses. However, they (Yana 
or Su) have not provided any financial forecasts or legal information about this proposed 
expansion. Yana and Su of course vote in favour of the proposals, and William also on 
pressure from Yana, does the same. Now William is unhappy because of his passive role, and 
to prove his worth,

Assignment BULAW2611 Organisations Law Semester 2, 2012 School of Business Purpose To enable you to apply problem solving skills and to research duties of directors, and consider a company’s relations...

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