Newcastle Law School FINAL (TAKE-HOME) EXAM Semester 1, 2022 LEGL2002 Law of Business Organisations

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IRAC Problem Questions (50 marks – 16.7 marks each) Question 1 (16.7 marks) The feasibility study for the transition into fully automated stores of SmartMarkets Pty Ltd (SM) indicates that several... million dollars will need to be invested in the first three years on software and hardware development as well as plant and equipment. At the first meeting of the board of SM, the directors discuss the various options available to SM to fund that project. These options include: - asking its holding company SmartyFoods Ltd (SF) to subscribe for additional shares in SM, or - borrowing money from SF, some major SF’s shareholders, or external lenders such as banks. You have been asked to advise the board of directors in regard to: (i) What are the key differences and factors for SM to make an informed decision between debt and equity funding? (ii) What legal considerations should the board of directors of SM bear in mind when issuing shares or securing a loan? (iii) According to your professional opinion, which of these is the best course of action for SM to fund the project? Question 2 (16.7 marks) Playco Pty Ltd is a manufacturer of children’s toys. It owns a large factory and warehouse in Sydney. It owns machinery and plant required to manufacture toys and has about $100,000 worth of toys stockpiled in the warehouse in anticipation of the Christmas rush. In 2018 it borrowed money from MacBank to upgrade its manufacturing processes to include mobile phones. Security was granted over machinery and stock. Playco’s main customer for the manufacture of mobile phones was Mobilco. As a result of legal action launched against Mobilco for breaching design and patent rights of its bigger rival Banana Phones, Mobilco did not renew its supply contract with Playco. Because of the loss of its major customer Mobilco and a significant downturn in the market for children’s toys in the past 12 months, Playco has serious liquidity problems. It has defaulted on its last three loan repayments with MacBank, and the bank has indicated that it intends to appoint a receiver. The directors of the Board of Playco are concerned about Playco’s position and the possibility that it may be involved in insolvent trading and are considering placing the company in voluntary administration. Explain the process of voluntary administration and its advantages and disadvantages in this situation for (i) Playco, (ii) its directors, and (iii) its secured and unsecured creditors. Question 3 (16.7 marks) SpeedyWay Pty Ltd (‘SpeedyWay’) is a small hire-car company. On 1st February 2019, one of SpeedyWay’s creditors filed an application for a compulsory winding up in insolvency. The application was granted and the court made the relevant orders to wind up SpeedyWay on 20th May 2019. A liquidator (Lexy) was appointed and, following an investigation of the affairs of SpeedyWay, Lexy estimated that SpeedyWay’s assets (plant and equipment and cash at bank) were worth about $50,000 and that SpeedyWay’s creditors (not including Pablo – see below) were owed $200,000. Lexy is not completely confident that this estimate is accurate since the company does not seem to have kept proper financial records. Lexy’s research has also uncovered a number of company transactions that she would like to investigate further. For example, Julia (the managing director and majority shareholder of SpeedyWay) caused SpeedyWay to sell a car to her good friend Fred for $10,000 on 21st November 2017. This was less than half the car’s appraised value. At the time, Fred had no knowledge of SpeedyWay’s financial position. On 1st November 2018, Julia gave $20,000 from the company funds to her daughter Hannah as an 18th birthday present. Hannah purchased a car with the money. Several years ago, SpeedyWay took out an unsecured loan for $50,000 from MacBank. In December 2018, SpeedyWay negotiated to make ‘interest only’ payments on the loan for the following 12 months (up until then the payment schedule had required ‘principal and interest’ payments). As part of that agreement, SpeedyWay granted MacBank a circulating security interest over its fleet of cars as security for the existing loan, and MacBank immediately registered that security interest. On 18th January 2019, Julia told her friend Pablo (who was owed $20,000 by SpeedyWay) that SpeedyWay was ‘hopelessly insolvent’ and that it would not be able to repay the full amount. Pablo agreed to accept a payment of $10,000 in full and final satisfaction of the debt. In relation to each of the four (4) transactions described in the preceding four (4) paragraphs, explain if any money might be recoverable by the liquidator for distribution to unsecured creditors and, if so, on what grounds? What other sources of funds might also be available for distribution to unsecured creditors? END OF EXAMINATION References Brotchie, J., & Morrison, D. (2020). Insolvent trading and voluntary administration in Australia: economic winners and losers?. Accounting & Finance, 60(1), 409-434. Doyle, L. G., & Keay, A. (2016). Insolvency Legislation. Jordans.. Qureshi, M. A., Ahsan, T., & Azid, T. (2017). Equity and debt financing strategies to fuel global business operations during crisis. In Global financial crisis and its ramifications on capital markets (pp. 297-319). Springer, Cham. Seunane, W. (2018). The impact of business rescue proceedings on the rights of creditors (Doctoral dissertation, University of Pretoria). [Show More]

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