Question 1 Jack, Sam and Sally were software engineers. They had worked for Prologic Ltd, an Australian software developer company, for many years. However, they were made redundant after the downturn in the IT industry. The three were good friends and regularly held social meetings where they discussed various new ideas together. Sam had an idea for developing a new computer game. He told Sally and Jack about his idea at a meeting in early January 2012. At the meeting, Sally also informed Sam and Jack that she had a similar idea. The three friends decided to work on the idea together with a view to profiting from the new computer game, named 'the Parallel Worlds' (TPW), which they believed would become a very popular game. In May 2012, Sam and Sally went to see Jack and showed him an early version of TPW. All of them contributed various suggestions to improve the game further. Three months later, they were able to produce the final version of TPW. At a meeting in August 2012, Sam produced a draft agreement, which he intended would be signed by the three of them. The draft agreement provided that: Regarding the computer game, titled 'the Parallel Worlds', we, the undersigned, unanimously agree to share all profits and/or income accruing from the sale, lease or licence of the abovementioned game. The game was originally developed by Sam and Sally, with the subsequent assistance and added concepts of Jack. We are the originators and equal share owners of the said computer game. We reserve all rights and the copyright in the said game. Underneath were typed 'Signed' and the names of the three intended parties to the draft Agreement. Sam and Sally signed the agreement, but Jack refused to sign. Jack explained that he totally agreed with the propositions recorded in the agreement, but he did not sign it because he wanted the terms of the agreement to be drawn up by his solicitor. However, before his solicitor was able to draw up a new agreement, Jack had a personal argument with Sam. He has not attended any meetings organised by Sam and Sally since September 2012. In January 2013, without informing Jack and seeking his approval, Sam and Sally granted an exclusive licence of the copyright of TPW to Excel Games Ltd (EG) in return for a royalty of $200 000 per annum. Jack was very disappointed when he found out that Sam and Sally had licensed the copyright of TPW to EG without his consent. Jack told Sam and Sally that he was entitled to a share of the royalty they received from EG. But Sam and Sally argued that Jack was not entitled to share any proceeds made from the licence of the game because he had been absent from the meetings for over three months and had consequently abandoned the project. Advise Jack on both (a) and (b): a) Is Jack entitled to a share of the profits made from the licensing of the copyright in TPW? b) What remedy, if any, may Jack seek against Sam and Sally? Question 2 Apex Ltd (Apex) is a public company listed on the Australian Securities Exchange. Global Building Products Ltd (GBP) was a wholly owned subsidiary of Apex Ltd (Apex), involved in the production of asbestos materials from 1945 until 1970 when GBP was dissolved. Dorak had been employed by GBP for over ten years during 1950 and 1965. During the course of his employment, Dorak was exposed to asbestos. As a result of exposure to asbestos during that period of employment, Dorak was diagnosed with asbestosis in 2009. However, GBP no longer existed and had no policy of insurance covering claims for damages for asbestosis. Faced with these realities, Dorak chose to take an action against Apex, his former employer's parent company, alleging that Apex, in addition to GBP, owed him a direct duty of care during the time of his employment and that Apex was in breach of that duty. Apex, however, denied that it owed a duty of care to Dorak, a former employee of GBP, arguing that the fact that Apex was the parent company of GBP did not of itself give rise to duties owed by Apex for the health and safety of former employees of its subsidiary company. Advise Dorak on both (a) and (b): (a) Did Apex owe a duty of care toward Dorak as a former employee of GBP under the general law and the Corporations Act 2001 (Cth)? (b) If so, was Apex in breach of the duty of care owed to Dorak? Question 3 Quick Ltd has been listed on the Australian Securities Exchange (ASX) since 2007. Quick is a leading transport and logistics company in New South Wales (NSW), providing supply chain and distribution solutions to all types of businesses. The company was in a strong financial position in the financial year ending 30 June 2012. On 1 July 2012, Danny became the managing director of Quick. The other directors of Quick were Amy, Barak and Chan. The day-to-day management of Quick was left to Danny. Amy, Barak and Chan conceived their role as that of planning and policy-making. In October 2013, the Supreme Court of NSW appointed a liquidator to Quick. An investigation of the affairs of Quick by the liquidator disclosed a shortage of funds of almost $4 million in the financial year ending 30 June 2013. Although there had been a steady increase in Quick's revenue in the financial year ending 30 June 2012, the liquidator reported the following transactions which occurred during the financial year ending 30 June 2013: 1. In July 2012, Quick purchased a $4 million vineyard in the Hunter Valley region in NSW from DJ Pty Ltd (DJ) of which Danny and his wife, Jenny, were the only directors and shareholders. Upon resale, it was only likely to realise $2 million and thus representing an expected net loss of $2 million. 2. In August 2012, Quick purchased five new transport trucks which were subsequently proved to be unsuitable and had to be replaced at a net loss of $900 000. 3. In September 2012, Danny had himself fraudulently misappropriated about $1 million from Quick's bank account to finance his extravagant lifestyle. Danny did not disclose his interest in DJ to the Quick board. Although Amy, Barak and Chan knew about Danny's interest in DJ, they did not raise this issue with Danny because they believed that Danny was acting in the best interests of Quick. As early as November 2012, Amy, Barak and Chan had a suspicion that Quick was unable to pay the large number of unpaid bills but they believed such debts would occur in the ordinary course of business. Advise the liquidator on both (a) and (b): a) Is there any possibility of legal action against all or any of the directors in Quick? b) Consider the position of each of the company's directors and their likelihood of running a successful defence to the action that might be taken. Question 4 MBC Ltd (MBC) is an Australian listed company which owns a chain of golf equipment stores throughout Australia. The majority shareholders of the company comprise the Dundee family. Mick Dundee, the Chief Executive Officer (CEO) of MBC, is keen to retire and pass the role of CEO over to his son, Simon Dundee. Simon has been on the MBC board of directors for two years. MBC is audited by GMG, a small accounting firm that specialises in complex audit work with 3 partners and 8 accountants. GMG has been auditing the accounts of MBC for 3 years and the partner in charge of the audit, Alinga, is a close friend of Mick Dundee. During the audit for the 2012/2013 financial year, Nancy, a junior auditor employed by GMG with only one year's experience in auditing, discovered some discrepancies during her testing of the level of inventories. Nancy is also friendly with a fashion designer, Ellin. In September 2013, Nancy attended the launch of Ellin's new fashion collection. The invitation said 'Ellin's new collection – brought to you by Simon Dundee.' When Nancy spoke to Ellin, Ellin told Nancy that Simon had given her a blank MBC cheque for $1 million to fund the collection. Nancy reported both the discrepancies with the inventories and her conversation with Ellin to Alinga. Alinga replied: 'Look Nancy, it's Mick's last set of accounts as CEO, so let's not upset him and I'm sure everything is fine as he is a great manager.' As a result, Nancy made no further enquiries into these matters. In October 2013, the financial accounts for MBC were signed off by the directors and the auditors and were released to the Australian Securities Exchange (ASX). In December 2013, a rival golf equipment retailer, Northern Golf Ltd (NGL), launched a takeover bid for MBC. The board of MBC decided to support the takeover and offered NGL the opportunity to examine its books and conduct a full due diligence. NGL declined and said that it was content to rely on MBC's published annual financial statements. The takeover was successful and in January 2014, NGL took full control of MBC. After the takeover, NGL discovered that the inventories were overstated in the accounts by $5 million and that Simon had not been authorised to give the cheque of $1 million to Ellin. Answer both (a) and (b): a) Has GMG breached any duties owed to MBC under the general law and the Corporations Act 2001 (Cth)? b) What remedy, if any, may MBC seek against GMG? Please remember - This examination question paper MUST BE HANDED IN. Failure to do so may result in the cancellation of all marks for this examination. Writing your name and number on the front will help us confirm that your paper has been returned. Question 5 In July 2010, Earl became the managing director of Ruby Pty Ltd (Ruby). The other two directors of the company were Peter and Smith. Peter and Smith took no part in the day-to-day running of Ruby. In August 2011, Earl and his wife, Jane, acquired two companies, namely King Constructions Pty Ltd( KC) and Gympie Electrical Pty Ltd (GE). Earl and Jane were the only directors and shareholders of both KC and GE. In September 2011, KC acquired equipment and hired it to Ruby while GE operated as asubcontractor to Ruby doing work on jobs obtained by Ruby. Invoices submitted by KC and GE werenot, as was the usual practice, checked by Ruby's supervisors. Those invoices were taken directly to Earl who then signed cheques in favour of KC and GE. In some instances, the invoices submitted by KC and GE were false. The invoices from KC and GE were prepared by Jane on the basis of information supplied by Earl. Earl did not disclose to Peter and Smith the existence of his own and his wife's interests in KC and GE in relation to the transactions with Ruby. Two months later, Peter and Smith were furious when they found out that Earl and Jane were the only directors of both KC and GE. Advise Peter and Smith on both (a) and (b): a) Has Earl breached his duties to the company (Ruby) under the general law and the Corporations Act 2001 (Cth)? b) What remedy, if any, may Ruby seek against Earl and the two companies (KC and GE) controlled by Earl and Jane? Question 6 BOB Ltd (BOB) and SUN Ltd (SUN) are finance companies listed in the Australian Securities Exchange Ltd (ASX). Adoni was the managing director of BOB and Bega was the managing director of SUN. In July 2011, BOB and SUN entered into a joint venture agreement. Under the agreement, BOB and SUN agreed to form a publicly listed company called MAR Ltd (MAR) which would make investments introduced to it by the joint venturers. The prospectus issued by the joint venture contained a statement about MAR's commitment to purchase 70% shareholding in Gold Mining NL (GM) from BOB for a purchase price of $900 000. Soon after its incorporation, MAR purchased from BOB the 70% shareholding in GM for $900 000 as stated in its prospectus. However, in the prospectus, there was no mention of: · the liquidity problems that had plagued GM over the previous months, or the downsizing of staff; · the fact that the vendor (BOB) had acquired the shares in GM for a consideration of $300 000 three months before selling them to the purchaser (MAR); and · the $50 000 fee received from the sale by a stock broking firm owned by Adoni and Bega. In December 2011, GM went into liquidation. Answer both (a) and (b): (a) Have BOB and SUN, including their directors, breached any duties under the general law and the Corporations Act 2001 (Cth)? (b) What remedy, if any, may MAR obtain against BOB, SUN and their directors, under the general law and the Corporations Act 2001 (Cth)? Question 7 Tommy and Sally are husband and wife and the only shareholders of Tommy & Sally Pty Ltd (TS). Tommy and Sally are two of the three directors of the company. The other director is Abba. Nancy, a close friend of Tommy, is appointed as a company secretary. Tommy is also the managing director of the company. Sally is apathetic about the affairs of the company, having allowed her name to be included on the board in deference to the wishes of her husband. Consequently, she has attended very few board meetings and, when present, has hardly contributed anything of substance to the discussion. Nor has anyone in the meeting expected her to understand fully all the issues involved. When a vote is required at a meeting, she always votes with her husband. The day-to-day business of the company is carried on by Tommy, Abba and Nancy, the company secretary. For over a year, Tommy and Nancy have been involved in fraudulent dealings in the affairs of the company without the knowledge of the other directors, although Abba has had some suspicions. However, Abba has always persuaded herself that it is imprudent to appear to be questioning the judgment and integrity of Tommy, who is, after all, the real owner of the company. The company, which is now in liquidation, owes $3 million to its creditors. Answer both (a) and (b): a) Is there any possibility of legal action against all or any of the directors and officers of TS? b) Consider the position of each of the directors and officers of TS and their likelihood of running a successful defence to the legal action that might be taken. Question 8 Anna, Boone, Caver and Smith are directors and shareholders of Azura Pty Ltd (Azura), which ownsand operates a general retail business. Each director owns 1000 shares at the issue price of $100 per share. Anna, Boone and Caver are also partners in an accounting firm, Anna & Co. Although Azura has been quite successful, it has not paid a dividend for the last two years. Profits have instead been reserved for further business expansion. At a meeting of the Azura board, Anna, Boone and Caver decide to operate a boutique as part of the company business. The fourth director, Smith, objects strongly to this proposal because he believes the expansion into a boutique business is too risky. However, Smith is outvoted. The relationship between Smith and the other three directors quickly deteriorates. Three months later, Smith realises that in all directors' meetings, his co-directors are acting in concert to oppose any suggestion put forward by him regarding the management of the company. At a general meeting, the majority, Anna, Boone and Caver, have passed the following resolutions: a) that Smith be removed from the membership of the board; and b) that the constitution be amended to the effect that there will be no dividend paid to ordinary shareholders and that only director's fees are payable. As a result, Smith finds himself deprived of dividend payments and is in effect excluded from getting any information as to what is going on with the company business. Moreover, Smith discovers that Azura has paid large consultancy fees to Anna & Co in relation to the boutique business expansion. Advise Smith on both (a) and (b): a) Have Anna, Boone and Caver breached any duties under the general law and the Corporations Act 2001 (Cth)? b) What remedy, if any, may Smith seek against Anna, Boone and Caver under the general law and the provisions of the Corporations Act 2001 (Cth)? Question 9 Rusty is the chief executive officer of Metal Mills Ltd (MM), an Australian listed public company. His wife, Tandy, is also one of the directors of MM. The constitution of MM stipulates that all legal documents of the company must be signed by one director and the company secretary and then sealed with the company's common seal. In November 2012, Rusty requested a loan of $10 million from Southern Bank Ltd (SB) so as to finance MM's takeover bid for Aus Steel Ltd (AUS). Rusty and Tandy witnessed a deed, given under seal, which guaranteed the loan repayment provided by SB. Rusty signed the deed as a director of MM, whereas Tandy signed the deed as the company secretary. Initially, SB refused to proceed because a solicitor of SB, who had searched the company documents of MM, found that Tandy was not the company secretary. James, the financial controller of MM, gave an assurance to SB, in Rusty's presence, that the correct people had signed the document and that Tandy had recently been appointed to that position. SB agreed to proceed with the deed on the basis of this assurance. In January 2013, MM became insolvent. SB subsequently found that no formal meetings of MM's board of directors had approved either the guarantee or the use of the company seal to execute the deed, nor had Tandy been appointed as the company secretary. Discuss the rights of the parties and advise SB as to whether it can enforce the deed against Question 10 Amy is a director of EXCO Ltd, a publicly listed company. Amy holds 5 per cent of the total voting shares in the company. Amy has recently been informed by the EXCO board that the annual financial statement, soon to be made public, will show that the company has suffered losses during the previous financial year. While purchasing some food in the company's cafeteria, Amy mentioned to Mark, one of the food servers, that the company 'had lost a lot of money' during the year. Amy did this because Mark had asked her why she looked so 'depressed'. Gale, who was visiting a business school friend at EXCO and was on the food line behind Amy, overheard this information. The next day, Amy sold all her EXCO shares, which she had purchased at $15 per share six months ago, for $25 per share. A week later, Gale sold her 20 000 EXCO shares, which she had purchased at $10 per share one year ago, for $20 per share. Two weeks later, Mark sold all his 10 000 EXCO shares, which he had purchased at $18 per share three months ago, for $15. When EXCO's losses were announced to the Australian Securities Exchange (ASX) one month later, its share slipped to $10 per share.