Question

QUESTION 1

Mick, Mark and Mike are directors and shareholders of MMM Hotels Pty. Ltd. Mick, the founder of the company, owns 80% of the shares while Mark and Mike each own 10% of the shares in the company.

Mick is also a single director and shareholder of CAT Construction Pty Ltd.

Mick convinced the board of MMM Hotels that the company could improve its position by refurbishing and expanding one of its hotels. The expansion required Council approval and a loan of $2.5 million.

Mick sought quotes from other construction companies (which exceeded the quote from CAT Construction) and ensured the quote from CAT Construction is well below these other quotes.

At the Board meeting, Mick showed Mark and Mike various financial figures, prepared by Ned, the newly hired graduate accountant at MMM Hotels and said “Ned is confident the company would benefit financially if we go ahead with this”. None of the directors understood the financial figures and had not realised the company’s cash flow was low and that the loan could lead the company into insolvency. Mark and Mike were unaware that Mick was also a director and shareholder at CAT Construction.

At the Board meeting, Mick further represented that “Council approval for this expansion is not a problem – our competitors have done similar expansions and have managed to get Council approval in a month or so.”

Mark and Mike relied on Mick’s representations to the Board meeting, as they were excited about the refurbishment and the potential for profits to increase and hence their remuneration to rise accordingly.

Mick had assumed that Council approval would be easily granted and did not attempt to seek approval until after Mark and Mike had signed the contract with CAT Construction. In the meantime, CAT Construction has commenced work and collected an advance payment of $400,000 from MMM Hotels. Two months after the refurbishment commenced, the Council informed him that the approval was not granted. MMM Hotels was struggling to meet its loan repayments and has become insolvent.

Mark and Mike have now realised the true state of affairs and demand that Mick repay the $400,000 to MMM Hotels at the general meeting. Mick being a majority shareholder in the general meeting passes a resolution ratifying the contract with CAT Construction

Answer the following questions:

1. Advise Mick, Mark and Mike whether they have breached any of the directors’ duties under the Corporations Act 2001 (Cth). 2 marks

2. Advise what if any defences are available to Mick, Mark and Mike 2 marks

3. Advise Mark and Mike what member’s remedies are suitable for them in the circumstances where Mick being a majority shareholder in the general meeting passes a resolution ratifying the contract with CAT Construction 2 marks

As things transpired, the directors had no alternative but to place MMM Hotels into voluntary administration and it was subsequently placed into liquidation.

4. The liquidator now desires to commence an action against the directors alleging the directors for insolvent trading. Advise 2 marks

5. The liquidator also desires to recover the $400,000 payment to CAT Construction, a related entity to Mick, under Part 5.7B Div 2 of the Corporations Act. Advise

Answer 1

solution:

The directors of MMM Hotels Pty ar in breach of the subsequent director duties beneath companies Act 2001(Cth)

a)Duty to avoid improper use of data and position. Section 183 of the Act provides associate degree obligation that prohibits a director from creating improper use of their position to achieve advantage to the hurt of the corporate. Irishman is beneath obligation to use his position properly and should not use his position for private gain.He uses his position to induce a contract for his company CAT constructions by beneath quoting competitors exploitation info gained from his position within the company.

b)Duty to act in honestness and correct purpose. the administrators should promote the longer term success of the corporate in deciding. In Re Smith & Fawcett Ltd the administrators ar guaranteed to exercise their power during a manner that they contemplate within the best interest of the corporate. Irishman doesn't promote the success of the corporate by ratifying the contract with CAT Construction even supposing he is aware of the corporate doesn't get council approval.Additionally Mark and microphone consider|suppose|deem|trust|admit|accept|have confidence|have faith in|place confidence in} Mick's illustration and don't conduct thorough investigations on the proposal since they're were excited about the restoration and also the potential for profits to extend and thence their remuneration to rise rather than company success

c)Duty to disclose interest in projected dealing. administrators of an organization should disclose personal interest in projected transactions or arrangement. The director should divulge heart's contents to the opposite administrators any material interests in any projected transactions to avoid conflicts.Director should not enter into any arrangement in wherever company's interest is clashed with their own interests. the administrators should not create any secret profit exploitation the position within the company. In Aberdeen Rly Ltd v Blaike Brothers it had been control that a director isn't allowed to enter into any arrangement that will raise conflict of interest. Irishman doesn't disclose interest in CAT construction and also the contract and so is in conflict of interest

d)Duty to act with care and diligence.The directors should act with care in physical exercise their powers as director.They must act as someone with similar data and skills in similar position is anticipated to act.Failure to conduct additional investigation to the financials of the corporate suggests that the administrators incomprehensible an opportunity to get the project wasn't viable and so save the corporate from economic condition.Thus all administrators ar in breach of this duty

Detailed Explanation:

2) Business Judgement Rule

The defense for administrators for selections that will be seen to breach their director duties is that the Business Judgement Rule beneath the Australian companies Act 2001 section one hundred eighty.Section 180(2) makes four conditions for this rule;

Makes the judgement in honestness for a correct purpose

Do not have a cloth personal interest within the material of the judgement

Inform themselves regarding the topic matter of the judgement to the extend they moderately believe to be applicable

Rationally believe that the judgement is in best interest of the corporation

3)Mark and microphone will institute a spinoff action against Irishman on behalf of the corporate. The allowance for spinoff actions is written within the companies Act 2001 (Cth) partially 2F.1A. It dictates that the court ought to permit a spinoff action wherever it's glad by those transportation the action that the relevant grounds needed for associate degree application are established. These are,

that shareholders ar acting in honestness,

that the action is in best interest of the corporate

it is unlikely the corporate would bring the action itself or take responsibility over the matter.

In John Shaw & Sons(Salford) Ltd v Shaw the court determines that if the facility to sue is alone unconditional on the administrators,then there'll be difficulties if the incorrect doers ar an equivalent board members associate degreed ar during a position to stop an action,then the court permits individual shareowner to bring action on behalf of the corporate

Thus Mark and microphone will reach transportation a spinoff action to void the contract legal by Irishman.

4)Under half five.7B Div a pair of of the firms Act , economic condition mercantilism refers to an organization that's insolvent however continues to trade even when the administrators discover of the very fact.A company is insolvent if it's unable to fulfill its money obligations after they fall due. the administrators of an organization should take moderately decent measures to mitigate from economic condition so as to shield its creditors interests. Failure to require these measures and continued to trade makes the administrators in person answerable for the debts incurred whereas the corporate was insolvent.

The directors of MMM Hotels Pty have interaction in insolvent mercantilism once Irishman unilaterally ratifies the CAT Construction contract knowing the corporate doesn't have the cashflows to avoid economic condition. the administrators should not continue mercantilism if they need data of economic condition.Any contracts created afetr this suggests the administrators ar in person liable.Thus Irishman is sued by the liquidator for the $400,000 paid to CAT.

References

Reisberg, A. (2009). spinoff actions and company governance. Oxford University Press.Thai, L. (2002). however standard ar Statutory spinoff Actions in Australia? Comparisons with us, North American nation and New Sjaelland. Australian Business Law Review, 30, 118-137.

Is the threat of voluntary administration credible in restructurings? (n.d.). Legal Services | Australia | Clayton Utz - Clayton Utz. https://www.claytonutz.com/from-red-to-black-2019/is-the-threat-of-voluntary-administration-credible-in-restructurings

Routledge, J., & Morrison, D. S. (2009). Voluntary administration: Patterns of company decline. C&S Law Journal, 27, 95.

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