Assignment BULAW2611 Organisations Law UOB_logo_v1.jpg Semester 2, 2012School of BusinessPurposeTo...

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Assignment BULAW2611 Organisations Law UOB_logo_v1.jpg 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 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 Limit
2,300-2,500 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 Date
Please see your lecturer, and refer to the Course Description, for due date and submission arrangements.
Required
Read the Fact Situation and complete the tasks in Part A(20 marks)andPart B (10 marks).
Support your answer with reference to relevant cases and legislation.
Fact Situation
Free 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 (20 marks)
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 (10 marks)
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.

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Robert · Accepted Answer

Assignment BULAW 2611 Organisations Law 
Part A 
A company is a formation of the promulgation. It is a completely distinct entity from its 
shareholders or the owners. It is entirely different from sole proprietorship where in the 
owner and the business unit are one and the same thing, even if the entire board of 
shareholders die, the company remains. It is recognised as a legal person and can sue and be 
sued. However, the company cannot act on its own. Even though it’s a legal entity, it requires 
someone to take forward its business and for this purpose, the law recognises the board of 
directors. A Company is a voluntary association of person, which is formed for the purpose 
of doing some business and thus attain profit. A company is a person in the eyes of law. The 
company can sue and it can be sued. It has its own name and a separate legal entity, distinct 
from its members who constitute it. A company has its own property, the board of directors 
or shareholders can’t claim the property of the company as their own property. There are a 
few advantages of a company. For instance: it is a separate legal entity from the owners, a 
person can buy a property in the name of the company, it can be operated by one director and 
shareholder however it is choice of the people forming the company as to how many they 
want to, if the company has goodwill then it is easier to attract capital. 
 The directors are obliged to see the company matter and are responsible for taking right 
decisions. The relationship between the company and its directors has evolved over the years 
and is very crucial. In this age of technology and high tech economy, the corporate 
environment has revolutionized to a great extent. The management has the power to control 
abundant amount of resources, owned by others. Corporate sector is one of the main sector 
from which the nation derives money(RAO, 2011).  
A perfect director is the one who has the ability to acquire money from corporate sector with 
his power and leadership skills. The correctness or otherwise of the decisions taken by them 
can make or break a number of lives be it the shareholders, employees, vendors, creditors or 
even the general public (McNaughton, 1989). Thus, it can be safely argued that the directors 
have the responsibility and thus it is their duty towards all the persons concerned. However, 
the law has changed from what it used to be. Historically, it was greatly believed that the 
directors have a eminent duty towards the shareholders and no one else(RAO, 2011). 
Directors have some duties and responsibilities towards the company, to its shareholders, and 
to all other dealing with the company. It is very important for directors to know what their 
responsibilities will be before they consent to become a director for a company. As per law 
duties of the directors are as follows: – 
 To work for the goodwill of the company - This duty makes sure whether one is 
dedicated and honest towards their responsibility and company. This indicates that the 
director should consider his interests and the company’s interest as a single entity. 
While working on the details of the company priorities should be set against share 
holders. But, in case of insolvent state, the focus diverts to the creditors. 
 Not to act for an improper purpose- Directors must not misuse their power for any 
unacceptable or improper activity. The director cannot use the powers for his own 
benefit, thereby overlooking the interests of the company.  
 Care and diligence – The directors should have the knowledge about the financial 
affairs of the company including its solvency. He should be able to guide the 
company by making responsible decisions(RAO, 2011). 
 Retaining discretion – Directors must be kept in a position where they can make the 
best suitable decisions for the company. They should never be put in a position where 
they have to put forward other company’s interests rather than their own company’s 
concerns. 
 Interests of the company- This is an important legal duty involving trust and honesty.

Assignment BULAW2611 Organisations Law UOB_logo_v1.jpg Semester 2, 2012 School of Business Purpose To enable you to apply problem solving skills and to research duties of directors, and consider a...

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