Walden University - BTX 9500BTX9500 Exam Sem 2
Question 1:
(a) Financial report disclosure and AGM (5 marks)
Pierce Pty Ltd was formed recently. During Pierce Pty Ltd’s first year of operations it hired 75 employees
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Walden University - BTX 9500BTX9500 Exam Sem 2
Question 1:
(a) Financial report disclosure and AGM (5 marks)
Pierce Pty Ltd was formed recently. During Pierce Pty Ltd’s first year of operations it hired 75 employees and was expected to be extremely profitable this year. Its three shareholders and respective shareholdings are
• Burns owns 4% of Pierce Pty Ltd’s shares;
• Donovan Ltd owns 76% of Pierce Pty Ltd’s shares; and
• McIntyre Pty Ltd owns 20% of Pierce Pty Ltd’s shares.
Burns was concerned when Pierce Pty Ltd’s directors told him that it would not send him a financial report. In addition, Burns was also worried that Pierce Pty Ltd would not have an annual general meeting (AGM) even though Burns asked for one to be called. Burns particularly wanted to use the AGM to force Pierce Pty Ltd to use less polluting practices in its production processes.
Explain whether Pierce Pty Ltd must give Burns its current annual financial report and hold the AGM to vote on the pollution reduction issue Burns was concerned with.
(b) Altering constitution and Share expropriation (5 marks)
Donovan Ltd operated a successful toy importing business. Its directors recently discovered that 10% of its shares were owned by Sleazy who was a convicted child molester. Fearing that Donovan Ltd’s wholesome reputation would suffer if Sleazy’s shareholding became common knowledge, the directors considered the following proposals
(i) call a shareholders’ meeting to insert a new clause in Donovan Ltd’s constitution forcing any shareholder with a criminal conviction to sell their shares to the other shareholders.
(ii) call a shareholders’ meeting to pass a resolution reducing the company’s capital by cancelling Sleazy’s shares and paying him the issue price.
Explain how case law or the Corporations Act operates in relation to both of the proposals
(c) Company’s relation with outsiders / s.129 assumptions (5 marks)
A clause in McIntyre Pty Ltd’s constitution requires a resolution of the board of directors to approve borrowings in excess of $1 million. Andrew, the managing director of McIntyre Pty Ltd, without consulting the board, borrowed $3 million on the company's behalf from Eastern Finance Ltd at a very high interest rate. Andrew signed the loan agreement as director of McIntyre Pty Ltd and forged the signature of the company’s secretary. Eastern Finance was given a copy of the McIntyre Pty Ltd's constitution, but no one in Eastern Finance read it.
Explain whether McIntrye Pty Ltd can argue that they are not bound by the loan from Eastern Finance Ltd because its directors did not approve the borrowing as required by the company’s constitution.
2 (a) Company’s relation with outsiders / s.129 assumptions (10 marks)
Downing Enterprises Ltd had 3 directors, Deng, Sufri and Bartlett. Hubert (who is not a director) was the company’s chief information manager responsible for maintaining the company’s computer and telecommunications equipment.
A while ago, Hubert purchased $200,000 worth of computer equipment for Downing Enterprises Ltd from Amos Computers Pty Ltd. Even though Hubert made the contract without prior board approval, Deng, Downing Enterprises Ltd’s managing director arranged for the company to pay the amount due. Deng did this because the directors didn’t want to upset Chia who controlled Amos Computers Pty Ltd. They wanted Chia to join Downing Enterprises Ltd’s board as a non-executive director to assist the company with its computer network. Deng was angry with Hubert and specifically instructed him not to make further equipment purchases without prior board approval. Not long after this Chia was appointed as a non-executive director of Downing Enterprises Ltd.
Several months later, Hubert approached Leonard, Amos Computers Pty Ltd’s chief salesman, and negotiated a $3 million computer purchase contract for Downing Enterprises Ltd. Initially, Leonard was surprised that someone in Hubert’s position would have the authority to place such a large order. Hubert, who had forgotten Deng’s earlier instructions, convinced Leonard that there would be no problems.
Explain whether or not Downing Enterprises Ltd is bound by the $3 million computer purchase contract negotiated on its behalf by Hubert. Would your answer be different if Deng made the $3 million computer purchase contract for Downing Enterprises Ltd?
(b) Directors duties and related-party transaction (10 marks)
Techno Industries Ltd owned 60% of the shares in Choudhary Marketing Pty Ltd the remaining shares were owned by a variety of different investors. Techno Industries Ltd arranged for 3 of its senior managers to be appointed as directors of Choudhary Marketing Pty Ltd. Gupta Software Pty Ltd, another company in the corporate group controlled by Techno Industries Ltd, borrowed $20 million from Colossal Bank Ltd to finance Gupta Software’s expanding business operations.
Acting on instructions from Techno Industries Ltd, the Choudhary Marketing Pty Ltd directors arranged for that company to guarantee Gupta Software Pty Ltd’s borrowing from Colossal Bank Ltd. Phillip, a director of Choudhary Marketing Pty Ltd, was in charge of major computer purchases for his company. He sought quotes from a number of different suppliers in relation to a $20 million computer purchase. Leonard, Amos Computers Pty Ltd’s chief salesman approached Phillip and told him that Amos Computers would deposit $1 million into a Swiss bank account for Phillip if he arranged for Choudhary Marketing to award the computer contract to Amos Computers. Phillip agreed. Choudhary Marketing bought the computers but they proved to be an inferior product and frequently broke down.
One consequence of this was that Choudhary Marketing’s profitability declined. As a result of Choudhary Marketing’s falling profits Techno Industries Ltd sold all its shares in Choudhary Marketing to Wiriana Holdings Ltd which replaced Choudhary Marketing’s directors with its own nominees. Advise the new directors of Choudhary Marketing whether its former directors breached their fiduciary duties in relation to the guarantee and the computer purchase from Amos Computers Pty Ltd.
Question 3 : Eiffel Towers Ltd, a listed company, was a builder and property developer specialising in projects in Melbourne's central business district. It has 5 directors. Giscard, Eiffel Towers Ltd's managing director and Henri, the company’s chief finance officer, were the only executive directors on the board. The others, all experienced business people, were non-executive directors and attended the monthly board meetings.
Over the past 2 years Eiffel Towers Ltd's financial position had worsened. Apart from Henri, the directors were unaware that Eiffel Towers Ltd's liabilities vastly exceeded its assets and that it had difficulties paying its sub-contractors and suppliers on time. Henri made sure the other directors were kept in the dark about this and did not give them meaningful or accurate financial information. The directors were satisfied with Henri's false assurances that the company's finances were satisfactory.
Several months ago, the following two important matters were considered at Eiffel Towers Ltd’s board meeting:
• Giscard asked the board to approve the acquisition of a development site owned by Blue Sky Pty Ltd for $90 million to be borrowed from Eastpac Bank. He explained that this site was suitable for a 50 storey office building. The board agreed with his suggestions notwithstanding that Giscard provided only sketchy details. In particular, the directors were unaware that Blue Sky Pty Ltd was controlled by Henri’s wife and had been trying unsuccessfully to sell the development site for $20 million. The board was also unaware that the zoning laws did not permit the construction of a 50 storey building on the site.
• Henri asked the board to agree to a proposal for Eiffel Towers Ltd to raise $5 million by offering to issue shares to the company’s employees as part of an employee incentive scheme. Henri argued that it would not be necessary for the company to prepare a prospectus.
(a) Director’s duties, Related party transaction (15 marks)
Assume, for purposes of Question 3(a) only, that Henri was last seen at the airport boarding a plane to Brazil. The non-executive directors ordered an investigation of Eiffel Towers Ltd's finances and for the first time became aware about the details about the zoning laws. They forced Giscard to resign and reported the matter to ASIC. Advise ASIC whether there have been breaches of the Corporations Act in the above circumstances.
Question 4:
(a) Phoenix company, unreasonable director-related transaction, unfair preference (12 marks)
Darius, together with his wife Martine and three children are the shareholders of Flash Autos Pty Ltd which operates as a retailer of used cars and vans. Darius runs the business of the company. Because of intense competition in the used car industry, Flash Autos fell into financial difficulties during 2007.
In February 2007, Darius sold eight cars owned by Flash Autos Pty Ltd and paid the money received into his and Martine’s joint bank account. He also sold a car valued at $45,000 to Martine for $15,000. Acting on legal advice, Darius drew up a document which contained a shareholders’ resolution authorising these transactions. All shareholders signed the document.
In March 2007, Mark went to Marcus, a wholesaler and paid him $85,000 in part payment of a debt owing from the purchase of cars in June 2006. Darius explained to Marcus that his business was going very badly but he did not want to see Marcus receive much less than was owed if Flash Autos Pty Ltd went into liquidation.
In April 2007 Darius registered a company by the name “Flashing Autos” Pty Ltd and transferred to it the ownership of 15 cars from Flash Autos. He also purchased other cars for Flashing Autos and largely ran his business through this new company.
In October 2007 Flash Autos Pty Ltd went into liquidation and it appears that there are few assets to meet the claims of unsecured creditors.
Advise the liquidator in relation to these matters.
Question Two
(a) Company Constitution, Replaceable rules (5 marks): Greenway Pty Ltd’s internal management was governed almost exclusively by its own constitution. The only replaceable rule it chose to retain is the one contained in s 201G which states:
“A company may appoint a person as a director by resolution passed in general meeting.”
There is nothing in Greenway’s constitution that allows for the appointment of a director by the board.
Kevin and Julia, the only shareholders of Greenway Pty Ltd apart from the directors, were informed by letter of the appointment of James to the board of directors. As a general meeting had not taken place they were troubled by the appointment. They confronted the directors and were informed that they were not obliged to comply with s 201G as it was merely a replaceable rule.
Advise Kevin and Julia whether there is any legal basis upon which they could force the company to comply with the replaceable rule and what further legal consequences could result if it did not.
(b) Director’s duties and phoenix company (5 marks)
Plasto Pty Ltd is a small manufacturer of plaster board. Its shareholders and directors are John and Peter. Plasto Pty Ltd sells plaster board to builders. Many of Plasto Pty Ltd’s customers have been complaining about the quality of the plaster board supplied by Plasto. The plaster has been falling off the walls and in many cases has had to be replaced. Some of Plasto’s customers have been threatening to take legal action against Plasto Pty Ltd alleging their plaster board was unmerchantable. John and Peter are fearful that Plasto Pty Ltd will lose the threatened legal actions and that it will not have enough money to pay the damages claims. They decide to form a new company, Plasto Australia Pty Ltd, transfer all of the assets of Plasto Pty Ltd to the new company and continue to trade under the new company. Plasto Pty Ltd is not in liquidation but is left an empty shell with no money, business or other assets. Advise the customers whether they can make John, Peter and Plasto Australia Pty Ltd liable for the damages caused by Plasto Pty Ltd.
(c) Insider trading (5 marks)
David is a director of Bell Ltd, a large public telecommunications company. At a recent board meeting it is decided that Bell Ltd will enter into a lucrative contract with Fibro Ltd, a supplier of fibre optic cables. This contract should result in a dramatic increase to Fibro Ltd’s annual profit.
Immediately after the board meeting David telephones his stockbroker friend, Max. David lies to Max and tells him that he has read an analysts’ report that recommends purchasing Fibro Ltd’s shares. David asks Max to purchase $5 million worth of Fibro Ltd’s shares for him.
Later that afternoon Max purchases the Fibro Ltd shares for David. Max also purchases $100,000 worth of Fibro Ltd’s shares for himself.
The next day Bell Ltd and Fibro Ltd announce the details of the contract to the market. Fibro Ltd’s share price rises by 25%.
Explain whether David and Max have contravened the insider trading prohibitions of the Corporations Act.
(d) Share capital reduction (5 marks)
Thompson Ltd. is proposing an internal restructuring of its share capital. Currently its issued share capital of $5 million is comprised of 4 million ordinary shares and 1 million preference shares. The company is proposing to cancel the ordinary shares of shareholders holding parcels of 500 shares or less and to return the issue price.
A group of shareholders to be affected by the proposal have come to you seeking advice as to whether there:
(i) are any provisions under the Corporations Act which the company needs to comply with to legally cancel the shares; and
(ii) is any possible legal action that could arise should the company fail to comply with provisions discussed in (i) above. Advise.
Question 3
Mario is the managing director of two companies, Northpoint Pty Ltd and Southpoint Pty Ltd. For many years Northpoint carried on the business of buying and selling land and Southpoint carried on the business of land developer. The two companies operated closely together and occasionally Mario was in the habit of paying the debts of either of the companies from the assets of the other company depending on where available funds were located. Mario’s wife Lisa is also a director of both companies but took no active part in the business of the company apart from signing forms brought to her by Mario.
During 2006 the companies fell into financial difficulties because a large commercial office development owned by Southpoint experienced substantial cost overruns. The offices in the development proved to be difficult to sell because of poor construction which caused cracking and other defects.
Southpoint had insufficient funds to pay its debts incurred in the development so in August 2006 Northpoint loaned $3 million dollars to Southpoint. This loan was made with no documentation and no provision for the payment of interest. In September 2006 further payments of $1.5 million were made by Northpoint to several creditors of Southpoint to satisfy their debts. In October 2006, Southpoint also borrowed $1.3 million dollars from Western Bank. One of the conditions imposed by Western Bank was that Northpoint guarantee the loan. Northpoint executed a deed of guarantee to enable the loan to proceed.
Despite these measures, it became increasingly obvious to Mario that by November 2006, Southpoint was unable to pay its debts and if Western Bank enforced its guarantee against Northpoint, it also would become insolvent. Mario formed a new company, Eastpoint Pty Ltd and transferred to it, ownership of the office development from Southpoint for an amount well below its market value. Later in the same month Mario and Lisa passed a shareholders’ resolution ratifying the transfer of ownership of the office development.
In December 2006, a creditor of Southpoint who was also a cousin of Mario’s, rang Mario to inform him of rumours he had heard that Southpoint was insolvent. He asked whether this was true and requested that he be paid the amount owing to him. Mario indicated that there were financial problems and because “they were family” arranged to pay his cousin the full amount owing plus an extra payment for the trouble caused by the delay in payment.
In February 2007 Western Bank appointed a receiver to Southpoint for non-payment of interest owing on the loan and enforced the guarantee against Northpoint. Soon after both Northpoint Pty Ltd and Southpoint Pty Ltd went into liquidation and it appeared to the liquidator that there were few assets to meet the claims of unsecured creditors.
(a) Director’s duty (Prejudice creditors), Antecedent transactions (12 marks): Advise the liquidator about the transactions which occurred during 2006 and any actions which may be brought by the liquidator in relation to these transactions.
(b) Director’s duties, Insolvent trading (8 marks): Discuss whether any contraventions of the Corporations Act have occurred and what actions ASIC could bring.
Question 4
Careers Online Ltd operated an Internet-based employment agency. It had the following 5 directors on its board:
• Robert, the company’s non-executive director chairman;
• Arthur, the company’s managing director;
• Jane, the company’s chief financial officer;
• Frieda, a non-executive director. She was also a partner in a large information technology consulting firm, Zender and Associates and was appointed to the board of Careers Online Ltd because of her technical expertise.
• Ashley, a non-executive director. He was the former managing director of Careers Online Ltd and had a detailed knowledge of the company’s business operations and the online commercial environment.
Careers Online Ltd used the replaceable rules with the following additional clauses in its constitution:
(a) Director’s duty to care and diligence (10 marks): For purposes of Question 4(a) only, assume that
• Careers Online Ltd completed the $25 million purchase of business from Your Space Ltd; and
• The purchase of Your Space Ltd’s business proved to be a financial disaster for Careers Online Ltd with the result that the shareholders replaced the whole board with new directors.
Advise the new directors of Careers Online Ltd whether its former directors breached their duty of care in relation to the decision to purchase the business from Your Space Ltd. Your answer should also consider whether the directors can rely on the business judgment rule.
(b) Company’s relation with outsiders (s.129 assumptions) (5 marks): For purposes of Question 4(b) only, assume that
• The $25 million purchase price of Your Space Ltd’s business exceeded 15% of the company’s issued capital; and
• Careers Online Ltd shareholders had not met to approve the purchase as required by its constitution.
Explain whether Careers Online Ltd can get out of the purchase of business contract by arguing that its shareholders had not met to approve the purchase as required by its constitution. Would your answer be different if Your Space Ltd owned some shares in Careers Online Ltd?
The issue in this case is whether CO is bound be the purchase of YS though they did not have a shareholders meeting of approve of it. Subsequently, can YS assert s.129 assumptions to make the contract enforceable.
.
(c) Company’s relation with outsiders (s.129 assumptions) (5 marks): For purposes of Question 4(c) only, assume that the directors of Careers Online Ltd do not wish the company to proceed with the $500,000 purchase of the hardware from Computer Systems Ltd.
Explain whether Careers Online Ltd can argue that Frieda was not authorised to enter into the contracts on the company’s behalf and Careers Online Ltd was not bound by the contract to purchase the hardware from Computer Systems Ltd? Would your answer be different if Robert entered into the contract instead of Frieda?
Question 5
(a) Company vs Partnership (8 marks): David and his sister Stephanie are actively involved in running a profitable wholesaling partnership business that has an annual $50 million turnover. They inherited the business from their parents, who died recently. David and Stephanie are both married and have young children. While they eventually would like their respective spouses and children to have a share in the business, David and Stephanie want to maintain managerial control. They appreciate that their business needs additional money to grow and would be happy to sell 20% of their business for a significant cash injection from one or more investors. They confidently expect that with additional funding their business would quickly achieve a $100 million turnover and control 30% of the market.
In view of the above, advise David and Stephanie whether or not they should continue to operate their business as a partnership. Would another type of structure be more appropriate for them in the future? Explain your reasons fully.
(b) Oppressive and unfair conduct, shareholders’ remedies (12 marks): Clayton Trucks Pty Ltd was a family business that operated a profitable transport business in Melbourne. It was founded by Rex Clayton in the 1960s. When Rex died his wife, Pamela, and their three sons (Tony, Mark and Andrew) inherited his shares and four of them were the company’s directors. Despite being a director, Pamela rarely involved herself in the management of the company’s business.
Tony and Mark regarded Andrew as a lazy man who was more concerned with playing golf than the business. For the last few years the three brothers constantly argued with each other about expanding the business. Tony and Mark wanted to set up operations in New South Wales and commenced negotiations for Clayton Trucks Pty Ltd to buy a Sydney-based transport business. Andrew disagreed with this. Indeed, Andrew disagreed with every important business decision his brothers made. Tony and Mark eventually got sick of Andrew’s attitude and stopped consulting him about business matters. Because Andrew stopped coming to work, Tony and Mark arranged for significant increases in their salaries and arranged for the company to pay very low dividends to shareholders.
Unknown to Andrew and Pamela, Tony and Mark formed another company (Sydney Transport Pty Ltd) in which their respective wives and children held all the shares. This company purchased the Sydney-based transport business which quickly became very profitable.
Not long ago, Tony and Mark borrowed $1 million from Clayton Trucks Pty Ltd and used the money to buy Pamela’s shares. After this share acquisition Tony and Mark held 75% of the shares in the company. When Andrew learned that his mother had sold her shares to his brothers, he asked them to buy his shares in Clayton Trucks Pty Ltd as well. Tony and Mark refused and used their newly increased shareholding to remove Andrew as a director. This meant that Andrew no longer received directors’ fees.
Question: Chris and John are mechanics who originally operated their respective businesses as sole traders. They decided to combine their experience and resources and formed a company called Clever Mechanics Ltd to run their new business. All of the assets of their respective businesses were transferred to the new company. The date of the certificate of incorporation was 10 January 2010. Chris and John are the only directors and shareholders of the company, holding 10,000 shares each, which have a nominal value of £1 each and are partly paid for to the extent of 50 pence per share. The business is run from the company‟s garage premises previously used by John, which he continues to insure in his own name.
On 1 January 2010, Chris ordered some motor parts from Dan costing £1,000. He signed the contract with Dan, „For and on behalf of Clever Mechanics Ltd (in formation)‟. Dan has not received any payment for these parts.
The company has been financed mainly by a £25,000 loan from South Bank plc and this was personally guaranteed by John. In addition, John‟s sister, Sue, invested in the company by taking a thousand 6% non-voting preference shares of £2 each in the company.
In May 2010, the company’s premises were destroyed by a fire. John made a claim on his insurance policy but the insurance company has refused to indemnify him, and John does not understand why. This has caused the company to go into insolvent liquidation. The liquidator has discovered that Chris was a director of another company called Intelligent Mechanics Ltd, which went into liquidation in 2009. Following the liquidation of this company Chris was disqualified for a period of 3 years.
Required: Advise Chris, John and Sue on their potential personal liability for the debts of the company and on any other matters that you feel are relevant. (25 marks)
2. Alpha Ltd (the company) is a private tutorial college. Alec, Christine and Barry are the only directors and shareholders of the company, each owning 100 shares. In addition, Alec has been appointed the managing director. The Articles of Association of the company contain the following clauses:
(a) In the event of a resolution being proposed at any general meeting of the company for the removal from office of any director, any shares held by that director shall carry the right to three votes per share.
(b) Jake shall be the company secretary.
(c) The managing director, Alec, shall have the power to veto any board decision relating to the teaching of any new course at the college.
In addition, there is a shareholders‟ agreement signed by the company and all of the shareholders that the company will not increase its share capital unless all of the parties to the agreement give their consent.
At a recent board meeting, Alec tried to exercise his veto after the board decided that the college should offer a new course but Christine and Barry ignored Alec’s veto. They then called a general meeting which passed a resolution ratifying the decision of the board. The company will need to raise additional capital to run the course but Alec has stated that he will not consent to any increase in the company’s share capital. Christine and Barry are now considering calling another general meeting to remove Alec as a director. Jake acted as the company secretary but has since been removed.
Required: Advise Alec and Jake whether they can rely on any of the above Articles of Association or the shareholders’ agreement. (25 marks)
The shareholders‟ agreement
3. Magda plc (Magda) recently created the following charges over assets:
(i) On 1 September, a floating charge over its stock of goods in favour of Beryl, to secure a loan by her of £50,000. This charge was not registered.
(ii) On 1 October, a floating charge over the entire undertaking of the business in favour of North Bank plc („the bank‟). The background to creating this charge was that the bank had granted an unsecured overdraft of £60,000 to Magda. The bank then asked for it to be secured and so the company paid the overdraft off with what little money it had and then immediately borrowed the money from the bank again, but this time on a secured basis. In consideration for granting the charge, the bank agreed to extend the overdraft facility to £70,000. The charge contains a clause which prohibits Magda from creating any further charges ranking equally with, or having priority over, the charge granted to the bank. This charge was registered on 10 October.
(iii) On 5 October, a charge which was expressed to be a „first specific charge‟ over its book debts in favour of East Bank plc („East Bank‟). The charge contained the following clause: “The company shall pay into an account with East Bank, designated for that purpose, all monies which it may receive in respect of the book debts, and shall not without the prior consent of East Bank in writing make any withdrawals or direct any payment from the said account.”
This charge was registered on 8 October. In addition to these charges, Magda has borrowed £50,000 from First Finance plc. The rate of interest charged by First Finance plc is 35 per cent.
Required: In the event that Magda goes into liquidation, discuss the nature and validity of the:
(a) 1 September charge. (7 marks)
(b) 1 October charge. (6 marks)
(c) 5 October charge. (7 marks)
(d) Loan with First Finance plc. (5 marks)
(a) 1 September charge: 1 October charge:
(b) 5 October charge:
(c) Loan with First Finance plc.
4. Sarah is the company secretary of Beta plc, („the company‟), a non-listed public company. She seeks your advice on the following matters.
(a) The company has 100,000 £1 preference shares and 500,000 £1 ordinary shares. The Articles of Association provide that the preference shares carry the right to a 12 per cent preference dividend and a prior right to the return of their capital on a winding up. They have no right to vote except at class meetings. The board of directors wants to reduce the preference dividend from 12 to 8 per cent.
(b) The company plans to allot an additional £30,000 ordinary shares with a nominal value of £1 to Roger, for £1.30 each. Roger cannot afford to pay for the shares in full and has suggested that the company allows him to pay £1 per share, and that he acts as the company‟s legal adviser for the next three months in order to pay for the premium. Alternatively, he has suggested that the company re-registers as a private limited company. Roger will then arrange a loan of £39,000 from his bank which will be guaranteed by the company.
Required: Advise Sarah:
(a) On the proposed dividend reduction and on any procedural matters necessary to implement it. (12 marks)
(b) On the validity of the plans to allot the additional ordinary shares to Roger. (13 marks)
5. Mytec plc („the company‟) designs and installs computer software. At a recent board meeting, the following resolutions were passed:
(a) To purchase a plot of land from Stuart, the husband of Mary, one of the company‟s directors, for £200,000. Mary did not disclose that the land is owned by her husband.
(6 marks)
Suggested answer
(b) To reject a proposed contract with Riverside University to install a new computer system in its library. The board did not feel that there was enough profit in the contract to make it commercially viable. After the meeting, Derek, a director of the company, approached Riverside University and has been offered the contract in his personal capacity which he intends to accept.
(7 marks)
Suggested answer
(c) To purchase some new computer equipment from iTech plc. This contract was negotiated by Ian, one of the company‟s directors, who, unknown to Mytec plc, has been paid a £5,000 commission for recommending iTech plc to the company.
(5 marks)
Suggested answer
(d) To award Edward, a director of the company, £100,000 compensation for loss of office.
(7 marks)
Suggested answer
6. Rubero plc (the company) is an importer of electrical equipment and was formed in 1990. It has two directors, Albert and Bob, and three shareholders, Albert, Bob and Clive.
The company‟s financial problems began in late 2007 when it lost its major customer. Since that time it has exceeded its overdraft on many occasions, its cheques have been returned unpaid, and trade customers have been paid either late, or not at all. The company made a loss in 2008 and 2009 but made a profit in 2010, following which the directors recommended a dividend that the general meeting declared shortly afterwards.
In November 2009, the directors started importing spare parts for motor cars. They did so in the hope of avoiding liquidation, even though no mention of this was made in the company‟s objects clause in the Article of Association. This did not turn out to be profitable and caused the company to lose a further £60,000.
By August 2010 the directors realised that there was no alternative to the company going into liquidation as the company could no longer pay its debts as they fell due. The directors intend to put the company into a members‟ voluntary winding up. Before doing so, they have ensured that any money that has been received by the company has been used to reduce the company‟s overdraft with West Bank plc, which they have personally guaranteed.
Required
(a) Advise the directors why a members‟ voluntary winding up is not possible.
(5 marks)
Suggested answer (b) If the company goes into compulsory liquidation by the court, explain what action a liquidator could take to swell the assets of the company available for distribution.
(20 marks)
Suggested answer
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