QUESTION ONE
Michael, Leonora and Gerry are friends who fly model aeroplanes in the weekends at a model aeroplane club. Michael has good technical skills and can assemble and repair the model aeroplanes. Leonora is an accountant and has good business skills. Gerry is a happy person who makes friends easily and is good at persuading people to do the kind of things she likes doing. Michael has been assembling and repairing model aeroplanes for other club members in his garage at home. He has to buy spare parts for the repairs and he resells the parts to the club members when the repair is complete. Leonora starts helping him to keep control of the payment of the expenses and the collection of the money. Being an accountant, Leonora persuades Michael to start charging for his time and trouble, and to add some more to his charges so Leonora can get paid for the accounting work.
Gerry hears about this and starts bringing along people from her wide circle of friends to be introduced to model aeroplane flying and to get Michael to assemble their planes for them and to keep them in good repair. Gerry also wants to be paid so that she can buy better aeroplanes for herself and her twin sons. They decide that the easiest way is to increase the fees that Michael is charging and for the three of them to share what is left over after paying for the costs of the parts and a small rental to Michael for the use of the garage. Leonora has discovered a good source of new model aeroplanes in Korea and starts importing them to resell through Michael's garage workshop, sharing the markup with the others.
Michael repaired a model aeroplane but when its owner flew it, immediately after getting it back from Michael, it malfunctioned and crashed. The model plane fell into a nearby business premises and damaged some very expensive equipment, belonging to Geek Ltd. Geek Ltd are suing for $300,000 compensation.
If the court action is successful, who would be liable?
QUESTION TWO
The concept of separate legal personality is fundamental to company law.
With close reference to leading cases, explain this concept and its relationship to the doctrine of limited liability. In your answer explain and analyse some of the critiques of this doctrine eg issues of moral hazard and the costs to society.
QUESTION THREE
To preserve commercial certainty, the Courts have been very reluctant to "raise the corporate veil" to impose liability on individual shareholders or directors.
Explain what is meant by the metaphor of "raising the corporate veil" with close reference to at least two cases in which the court has been required to consider this issue.
QUESTION FOUR
Two cousins, Sean and Rochelle, decided to transfer their partnership business, which supplies commercial cookware to restaurants, to a newly formed company. They registered Cookwell Ltd as a limited liability company and arranged for it to purchase the partnership business. Shares in Cookwell Ltd were allotted equally to Sean and Rochelle. Both were also appointed as the company's directors. Neither was appointed managing director although in practice, day-to-day decisions on running the business are left to Sean. Sean's ex-wife, Delilah, was appointed as the company's accountant.
Recently, Sean saw an acrylic painting by a well-known New Zealand artist for sale for $150,000. He thought the painting was particularly suitable for the board room and that the price being asked was a bargain. There was no time to contact Rochelle so Sean decided to go ahead with the purchase without informing him. The vendor insisted that Sean sign a written agreement. Rochelle, on learning of the purchase, is upset and seeks your legal advice.
a) Advise Rochelle whether Cookwell Ltd can refuse go ahead with the purchase IF
- Sean signed the agreement as ‘director of Cookwell Ltd' with Cookwell Ltd stated to be the purchaser; and
- Cookwell Ltd's constitution contains no special provisions dealing with corporate capacity.
b) Now assume that Cookwell Ltd's constitution has a provision in it requiring all contracts over $100,000 to have board approval and to be executed by both directors. If Sean and Delilah both signed the purchase agreement, as directors of Cookwell Ltd, but did not tell Rochelle of the purchase, would the company be bound by the agreement? Explain why or why not.
c) What difference, if any, would it make to your answer to (b) if, prior to entering into the contract, the vendor overheard Sean telling Delilah that Rochelle was unaware of the purchase?