Question

Designer Kitchens Pty Ltd (“DK Company”) creates modern kitchens for apartment buildings

and has been very successful since 2015. DK Company has three directors - Ken is the

Managing Director, Leanne is a Non-executive Director and Mike is the Chief Financial

Officer.

At a board meeting held in January 2020, Ken proposes that DK Company should enter into

an exclusive contract to supply cupboards to Master Craft Pty Ltd (“MC Company”) to use

in their custom-made kitchens. Ken explains that MC Company is a successful company and

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could provide a regular income to DK Company. However, he neglects to inform the board

of directors of DK Company that his family owns MC Company. Ken and his wife Ellen are

directors and shareholders of MC Company.

Furthermore, he does not explain that MC Company also faces liquidation. His purpose in

making the contract proposal to the board of directors is to save MC Company from collapse.

MC Company failed to pay the $400,000 it owes DK Company for the cupboards, thereby

causing significant financial loss. As a result, six months later, DK Company was placed in

voluntary administration.

Answer 1

This is a fraud case of hiding the important information before entering into a contract. But due to an important characteristics of a company "Separate Legal Entity" which means that the company has a separate existence and is a separate legal entity from that of its owners or managers. Thus in case of liquidation or fraud, the company's owners property is distinctive from the company's liabilities. Owners properties cannot be touched in order to pay off the liability of the company. Thus Ken is safe as it has separate existence from that of MC Company.