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Law Questions

Question 1 (30 marks) (2000 words maximum)

Eiffel Towers Ltd, a listed company, was a builder and property developer specialising in projects in Brisbane’s central business district. It has five directors. Giscard is the managing director and Henri is the chief financial officer. They are 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 two years, Eiffel Twoers Ltd’s financial position had worsened. Apart from Henri, the directors were unaware of this. Henri made sure the other directors were kept in the dark about this and did not give them meaningful or accurate financial information. The other directors did not read the financial reports and were satisfied with Henri’s false assurances that the company’s finances were satisfactory.

Several months ago at a company’s meeting, Giscard asked the board to approve the acquisition of a development site owned by Blue Sky Pty Ltd for 50 million, to be borrowed from Eastpac Bank. This is because Henri convinced the rest of the board to contract with Blue Sky Pty Ltd. Giscard 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 Blue Sky 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.

Not long ago the non-executive directors ordered an investigation of Eiffel Towers Ltd’s finances and for the first time became aware of the zoning laws. They forced Giscard to resign and reported the matter to ASIC.

You as a professional accountant are asked to write a formal letter to ASIC advise it whether there have been breaches of the Corporations Act 2001 (Cth) in the above circumstances.
In you answer consider the positions of each of the directors and any possible defences. (20 marks)

You should use both primary and secondary sources, e.g. legislation, case law, text books, journal articles and websites, to demonstrate your research skills in support of your advice in the letter. (5 marks)

Letter format and communication skills. (5 marks)

Question 2 (15 marks) (1000 words maximum)

Lily and Morris are the directors and shareholders of Zap Graphic Pty Ltd. Recently, the company began to suffer cash flow problems and needed additional capital. Lil persuaded Rodney to invest $100,000 in the company. Lily and Morris held a directors’ meeting and decided to issue Rodney with two shares in the company. A general meeting of shareholders also appointed Rodney as a director of the company.

The company’s financial position improved as a result of Rodney’s $100,000 investment. Despite the company’s increased profits, Lily and Morris decided not to declare a dividend for the current year. Instead they gave themselves pay rises and arranged for the company to lease two new Mercedes-Benz cars for their personal use. At the board meetings, Rodney made a number of suggestions to improve the profitability of the business. He also questioned Lily and Morris about their pay rises. Lily and Morris resented these questions. According, Lily and Morris formed another company, LM Graphic Pty Ltd, in which Rodney was not involved, and diverted a valuable government design contract that they had been negotiating for Zap Graphic Pty Ltd to their new company. In addition, Lily and Morris also called a shareholders’ meeting at which it was resolved that Rodney would be removed from his position as a director.

Advise Rodney what legal remedy/remedies he has.

Question 3 (15 marks) (1000 words maximum)
Bill and Bob are the directors and shareholders of a very small company which imports soft toys from overseas for sale to various retail outlets. The company has a small warehouse where it keeps its goods, and from which all products are distributed.

The company recently entered into a contract to supply a large chain with soft toys, and they accordingly ordered large amounts of goods from overseas. The company ordered four shipments of goods from a supplier and have paid them a large deposit. However, after only one delivery to the retailing chain, a defect is discovered and the government puts a banning order on the sale of the toys, the retailer cancels all further orders.

The company now has no future revenue; there are stocks of goods which cannot be sold. The shipping company which brings the goods into Australia for Bill and Bob is now waiting for payment. There are also various bills to the tax office, employees and others who have provided services to be paid.

Bill and Bob are desperate. Advise what they need to do. Is the company insolvent, and if it is, what must Bill and Bob do?

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