QUESTION 1 – ANSWER ALL SUB-QUESTIONS:
Upfront Nightspots Ltd (UN) is a company that owns several pubs and clubs across the Sunshine Coast in Queensland. The managing director of UN is Delia Dancer, who has extensive experience managing holiday resorts and property developments in Queensland and New South Wales. The board is made up of Delia and four non-executive directors: Naomi Wicks (the chairperson), Ron Harel, Segev Azulai and Assaf Meyer.
Delia Dancer also owns 60% of the shares in another company, Akvacider Pty Ltd (Akvacider) and is one of the three directors of that company.
In October 2019, an opportunity to buy five night clubs from Supapub Pty Ltd (Supapub) becomes available. These night clubs were very popular in the early 2000’s but have since become run-down and require significant improvements. Delia suggests to the board of UN that they commission a valuation and report to investigate the costs of upgrading and developing these night clubs and consider whether they would be a profitable acquisition for UN to pursue. As such, UN engages Big Picture Valuers Pty Ltd (BPV) to prepare the valuation and report.
In December 2019, Martin Wexler from BPV presents the report to the board of UN. The report itself provides a detailed valuation and cost/benefit analysis. It indicates that re-developing the resorts would require a significant investment of capital but, because of their prime locations, they would ultimately be quite profitable. However, when Martin presents the report to the board, he focuses on the significant costs involved.
Whilst Delia has read the report in detail, at the meeting she affirms Martin’s focus on the high costs and recommends against proceeding with the acquisition. The rest of the board do not read Martin’s report but rely on both the verbal presentation of Martin and on Delia’s recommendation. The board therefore resolves not to proceed with the acquisition.
On 6 January 2020, Akvacider Pty Ltd enters into a contract with Supapub to acquire the five night clubs. In a press release made available that day Akvacider indicate that they are expecting significant profits to be gained from the redevelopment of the properties over the next five years.
Kofi Ghali, a shareholder in UN, sees this press release and is surprised. He asks Boutros Annan, with whom he is friends, why UN had not taken up this opportunity. Boutros responded saying that UN’s board did get a report and that, whilst he cannot remember the details, their Managing Director (Delia Dancer) had recommended against proceeding. Kofi looks at the website of Akvacider and discovers that Delia is one of Akvacider’s directors.
Advise Kofi on:
- Whether Delia has breached her general law duties to UN Ltd or sections 182 or 183 of the Corporations Act 2001(Cth) in relation to the acquisition of the properties by Akvacider Pty Ltd; [10 marks]
- Whether the non-executive directors of UN have breached s180(1) of the Corporations Act2001 (Cth) in resolving not to proceed with the purchase of the properties from Supapub and whether there are any relevant defences to such a breach; [10 marks]
- Whether, if the directors of UN have breached their duties, there is anything Kofi can do as a shareholder to enforce the company’s rights. [10 marks]
TOTAL MARKS FOR QUESTION 1: 30 MARKS
QUESTION 2 – ANSWER ALL SUB-QUESTIONS:
From January 2017, Supaextravit Pty Ltd, a small vitamin store, has rented space from A-Shop Pty Ltd (A-Shop) at a strip of shops on Retinol Street, Calciferol, Qld. A clause in the lease agreement between Supaextravit and A-Shop limits A-Shop from leasing any of the other shopfronts in Retinol Street to a direct competitor of Supaextravit. The directors of Supaextravit are Ellen Tocopherol and Brian Cobalamin.
From May 2020, Supaextravit have financial difficulties as a result of decreased sales after A-Shop rented space to another vitamin store, Riboniacin Pty Ltd, just two doors down from Supaextravit. In June 2020, Supaextravit start having trouble paying their suppliers and by November 2020 they have also accumulated a debt of $8,000 to A-Shop in late rental fees.
On 10 November 2020, Maggie Salt from Minbath Pty Ltd meets with Ellen and Brian and suggests that Supaextravit might like to start selling some of their magnesium bath salt products as a way of diversifying their income. Ellen and Brian, distraught as to how they are going to stay in business, decide that this is a good opportunity and agree to a 6-month supply contract, even though they are not sure how they are going to pay for it.
In January 2021, A-Shop served a statutory demand upon the registered office of Supaextravit under section 459E of the Corporations Act 2001 (Cth). The registered office is the office of Supaextravit’s accountants, who call Evelyn and Brian to notify them of the statutory demand. Ellen and Brian explain that they do not think they should have to pay the rent because they had lost more than $9,000 in trade due to A-Shop leasing of premises to Riboniacin in breach of the lease agreement. They also note that they are not able to pay the $8,000 anyway.
Advise Ellen and Brian (the directors of Supaextravit) on:
- Whether there are any options in relation to the external administration procedures under the Corporations Act2001 (Cth) that could assist them in continuing the business; [6 marks]
- What the implications of failing to pay the statutory demand from A-Shop are and whether they can apply to have the statutory demand set aside; [8 marks]
- Whether, if Supaextravit iswound up, Ellen and Brian should have any concerns about potential breaches of the Insolvent Trading provisions in the Corporations Act 2001 (Cth). [6 marks]
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