Question 1

Smart Toy Pty Ltd is a manufacturer and seller of children’s toys. A child aged 3 was seriously injured after chocking on one of the toys made by the company as the toy contained small components. There was no warning sign placed on the packaging and neither was there any age suitability guidance . The child’s parent is seeking advice to sue Smart Toy Pty Ltd.

After the matter was widely reported, Smart Toy Pty Ltd sales dropped drastically and this resulted in financial difficulties. Johnny, the director of Smart Toy Pty Ltd in his desperate attempt to save the company, entered into a contract for £5 million which was far from what he was authorized to do. Smart Toy Pty Ltd went into liquidation soon after.

The company now, is in an even worst state because a senior staff of Smart Toy Ltd, Jerry, was caught smuggling drugs and the drugs were found stored in Smart Toy Pty Ltd.’s warehouse. Smart Toy Pty Ltd was called for questioning and the matter is now pending further investigation.

Required:-

Advise the company as to their liability in the negligence suit by the child’s parents, the likelihood of the company being criminalized for drug trafficking, and the unauthorized £5 million contract entered by Johnny. 

Question 2

Jamie is a supplier who previously received a contract to supply office equipment to Education Departments under the Ministry of Education. According to the contract there is a clause stating that, no person who had obtained such a contract is eligible to submit their tender for other contracts from the same Ministy to curb monopolisation and to encourage equal opportunities for other suppliers. In order to be eligible to submit the tender for the supply of computers to the schools, Jamie forms a proprietary company limited by shares, Hitech Pty Ltd. In every respect, the company adheres to all the provisions of the Corporations Act. Jamie, her brother, and his wife, are the sole shareholders of the company. The company managed to secure the tender to supply the computers, however the Ministry withdrew their offer after scrutinizing the information on the company that indicated Jamie as one of the shareholders.

Hitech Pty Ltd established a subsidiary, Perfect Research Pty Ltd to develop and market telecommunications products. Hitech sanctioned extremely favourable loans to Perfect in order to fund its research programs. Hitech retained three of its board members on Perfect’s board. There are five directors on Perfect’s board. Perfect however continued to be heavily indebted and the company fully relied on Hitech’s continued financial support. Perfect was charged for tax avoidance and trades whilst insolvent.

Required:-

Jamie intends to take action for specific performance against the Ministry saying that it was not her who was the successful bidder, but the company.

1) Discuss the likelihood of success of this argument while assessing arguments that may be made by the Ministry.

2) Whether Hitect will be made liable for Perfect’s tax avoidance and insolvent trading. 

Question 3

Sam, John and Peter are the directors and shareholders of Happy Times Pty Ltd (‘Happy’), a company that owns Milton Hotel. Sam and Peter hold 30% & 45 % of the shares respectively in the company. 10% of shares are held John and the remainder of 15% is held by 3 persons, each with 5% of the shares. The recent Covid 19 pandemic, has affected the tourism industry badly and Milton Hotel had to be closed down. Happy is now facing financial difficulties, although not yet insolvent, and has reasonable cash reserves on which to draw if necessary.

Peter and Sam have had enough of the tourist industries and wish to get out of the business. They decide that Happy should lend $40,000 of the company’s cash reserves to a new business, which is owned by Peter’s and Sam’s sisters, (Love Match Pty Ltd) at an interest rate of 3.5% per annum. Their company provides international matchmaking services. At the board of directors meeting called to decide on this matter, John expresses concern about the loan, stating that he believes the company should be consolidating its current activities and maintaining its cash reserves rather than providing a loan to a new and unproven business. Peter and Sam outvote John and the loan is given to Love Match Pty Ltd. Peter and Sam subsequently remove John from the board of directors (in accordance with s 203C). John is furious about these actions. He believes that that the loan will cause Happy to become insolvent, and that Peter and Sam are trying to prevent him from having a say in the company.

John, together with the remaining 15% of shareholders, in retaliation, intend to file a lawsuits against the company and the other directors.

The company’s constitution was altered by special resolution of the company during a general meeting. The constitution now gives the current directors of the company the power to compulsorily acquire the shares of any member at a fair price. Peter and Sam have informed the remaining 25% of shareholders that they intend to exercise this power to acquire the shares.

Required:-

1) Is there any cause of action by John and the other 15% shareholders against the company and the directors?

2) Advice the remaining 15% of shareholders on whether they could argue that the alteration made to the company’s constitution in this case is invalid.

Question 4

Love Match Pty Ltd (Love) is an international match making service company. One of Love directors, Micheal, is in extreme financial difficulty and is close to having to declare himself bankrupt (which would make him ineligible to act as a director of Love). Accordingly, to prevent this, the other directors of Love caused the company to lend Micheal $15,000. The transaction was disclosed at a meeting of the directors and the directors unanimously agreed to authorized the loan. Micheal was present at this meeting, but did not vote on whether the loan should be sanctioned. The directors of Love also caused the company to lend $5,000 to Sally, who will then pay off the loan over a two-year period. Sally is a major client of Love, but aside from this, she has no other links with the company or its directors. Love also invested in a new software worth $1,000,000/-. A number of Love members heard of the loan and investment and argued that Sally must repay the money immediately. They were also against the investment. The board of Love discovers that XYZ Pty Ltd is considering a takeover bid of Love. The directors genuinely believe that it would not be in the interests of the company or its members for Love to be taken over by XYZ. Accordingly, the directors cause the company to issue new shares to Sylvia – an existing member who is known to oppose the takeover – with the aim of preventing the takeover from succeeding.

The investment in the software was a total lost and resulted in Love becoming insolvent. A winding up application was filed on 1st July 2019 against Love Match Pty Ltd (Love). The application was granted and the relevant orders were made on 15 September. Following an investigation of the affairs of the directors, the liquidator uncovered the following:

(a) On 1st March, Jenny (managing director and majority shareholder of Love) gave her daughter Sammy $20,000 from company funds as a twenty-first birthday present. Sammy purchased a car with the money. Jenny uses the car whenever she wishes, as Sammy lives at her home. Sammy still owned the car at 15 September.

(b) On 10th April, Jenny told Jackson, a creditor of Love, to whom the company owed $10,000 that Love was hopelessly insolvent and would not be able to pay the full amount and thus got the creditor to accept 50% in full and final satisfaction of the debt;

(c) The loan to Micheal and to Sally

(d) Love had operated on a $100,000 overdraft from Advanced Bank and Jenny was personally liable under a personal guarantee for the amount of the overdraft.

(e) The company’s equipment and cash at bank were worth about $50,000 and creditors (not including Jackson) were owed $1,200,000.

Required:

1) Advise the members whether the director had breached their duties;

2) Discuss the law in relation to the above factual situation and determine what steps the liquidator might take to recover further moneys available for distribution. 

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