Legal Regulation of Business Structures Written Hypothetical Assignment
QUESTION 1 -
Jana Jones and Adrian Allport and two recent College of Art graduates with plans to set-up a company that produces custom-designed artwork for scooters. They have been engaged in discussions with Bob Golding, who has experience mass-producing scooters for a number of Australian companies. At a meeting on the 31st of July, the three of them decide to go into business together. Jana and Adrian get to work on developing their business plan and on the 10th of August they register Sunshine Scooter Art Pty Ltd with ASIC, with Jana, Adrian and Bob as directors.
However, Bob was incredibly eager to get things up and running so on the 4th of August he signs a contrast on behalf of Sunshine Scooter Art with Computer Supplies Pty Ltd for 10 new computers, to be delivered on the 1st of September. Whilst Jana and Adrian are working on their business plan, and getting excited about all the potential art designs they will develop, Bob is eager for SSA to engage in the mass-production of scooters. As such, on the 15th of August he has a meeting with Talia Clint, the sales manager for Plastica Pty Ltd, a plastics and fiberglass company. At the meeting Bob provides his business card, which lists him as "Director, Sunshine Scooter Art Pty Ltd". They negotiate a larger supply contract ($50,000) from Plastica Pty Ltd to be paid in instalments, with the first payment due on the 1st of September. When it comes to signing the contract, Bob signs as "sole director".
The constitution of SSA provides that to be binding on SSA, any contracts for greater than $10,000 must be approved by board resolution and executed by two directors.
On the 1st of September Jana and Adrian receive the delivery of the new computers, along with an invoice from Computer Supplies Pty Ltd for $8,000, as well as the request for payment of the first instalment from Plastica. Given the low amount of capital they have to start with, and their intentions to start things small, Jana and Adrian are shocked and come to you for advice.
Q1: Advise Jana and Adrian as to whether SSA is bound to the contracts with:
a) Computer Supplies Pty Ltd; and
b) Plastica Pty Ltd.
QUESTION 2 -
Superdry Holdings Ltd ("Holdings") is the parent company in a group of companies that manufacture, distribute and sell a range of wet-weather gear, including Superdry Manufacturing Ltd ("Manufacturing") and Superdry Retail Stores Ltd ("Stores"). The directors of Superdry Holdings are Francis Nice, Jack Roach and Alice Wendall. Francis, Jack and Alice sit on the boards of Manufacturing and Retail, but each of those subsidiaries also have three independent non-executive directors.
Shareholdings in the companies are made up as follows:
- Superdry Holdings Ltd: 50% Francis Nice; 30% Jack Roach; 20% Alice Wendall.
- Superdry Manufacturing Ltd: 70% Holdings; 30% widely dispersed shareholdings (i.e. "Mum and Dad investors')
- Superdry Retail Stores Ltd: 30% Holdings; 70% widely dispersed shareholdings (i.e. "Mum and Dad investors")
Stores is doing well financially. This has traditionally been because Stores is able to purchase umbrellas, boots and other wet-weather gear from Manufacturing at significantly reduced rates. Stores runs a successful chain of retail stores that sell the Superdry product range. In recent years, however, they have also started stocking other brands, which often sell better than the Superdry products.
Holdings and Manufacturers are both in financial difficulties and are facing significant pressure from Finance Bank Ltd in relation to business overdraft facilities provided by Finance Bank to those companies, which have now substantially exceeded agreed limits. Finance Bank agrees not to take legal action against Holdings and Manufacturers as long as further security for the debts (in addition to the personal guarantees of Francis, Jack and Alice) can be provided.
At a meeting of the board of directors of Stores in August 2017 it was agreed that Stores would provide a guarantee to Finance Bank of the debts of Holdings and Manufacturers. The minutes reflect as the reasons for this decision that:
1. It is in the best interests of Stores that Manufacturers continue as a viable entity which can supply products at reasonable rates;
2. The reputation of Superdry Retail Stores could be adversely affected by a failure of any company within the corporate group.
Karen Cripps, a non-executive director of Stores, disagreed with the provision of the guarantee, but was voted down. She believes that Jack, Alice and Francis are simply worried about their potential liability on the personal guarantees they have had to provide to Finance Bank, and their reputations as directors of the companies of the group if Superdry goes under.
Q2: Advise Karen as to whether Jack, Alice and Francis have breached their equitable and statutory duties to Superdry Stores Ltd (including any remedies or penalties that might be applicable).
ASSESSMENT CRITERIA - As noted in the course outline, the assessment criteria for this assessment task are:
1. Demonstration of knowledge of the law, as evidenced by accurate statement of relevant legal principles;
2. Demonstration of understanding of the law and critical thinking, as evidenced by cogent and coherent analysis of the law;
3. Demonstration of requisite academic communication skills, as evidenced by logical structure of arguments, appropriateness of conclusions, accuracy of citations (legal referencing) and academic referencing and use of accurate and appropriate expression.