LEGL2002 Law of Marketing Business Organisations

Question 1 (15 marks)

CyberSpace Technology Pty Ltd (CST) develops blockchain and cryptocurrency. Kim and Garrett are the directors and equal shareholders in CST. They want to expand operations to smart contracts and remittances, so they quickly start exploring several ways to achieve their goal.  After giving it a lot of thought, they conclude that they need to raise funds to buy more spacious premises, powerful computers and data storage servers. They meet Phil Entropy, a retired businessman looking for a profitable business to earn a 10 per cent return on investment.  After a business meeting between them, Phil comes to you for advice on ––

1. the legal advantages and disadvantages if he were to lend money to CST and charge interest in return for the loan;
2. a type of contractual arrangement he could negotiate with CST to maximise the chance of recovering the loan in case of underperformance or default, considering the order of priority amongst creditors in the event of CST’s liquidation;
3. advantages and disadvantages if he were to subscribe shares in CST rather than lending the money;
4. whether he should subscribe ordinary, preference, fully-paid, partly-paid, cumulative, or non-cumulative shares; and
5. any rights he might have if he either subscribed shares and suffered oppression as a minority shareholder, or lent money and tried to avoid a contravention of the Corporations Act 2001 (Cth) negatively affecting his interests as a creditor.

Question 2 (15 marks)

Andrew, Becky, Carol and Dean are directors of Icarus Airline Ltd. Icarus operates domestic flights in Australia and is listed in the Australian Securities Exchange (ASX). Icarus relies heavily on Midas Bank Ltd to increase its liquidity by maintaining an overdraft facility with no security, which falls due in full on 1 July 2023. Icarus leases most of its aircraft from a large state-owned airliner that operates nationally and internationally.

In the aftermath of the Covid-19 lockdowns, Midas Bank suspends all credits to Icarus while many of Icarus’ suppliers become nervous and service the company only on a strict cash-on-delivery basis. Icarus’ directors receive numerous calls and emails from creditors anxious about when they will be paid. Andrew, Becky, Carol and Dean start paying the most demanding creditors while postponing the others. It is only a question of time until cheques start bouncing.

The stock market reacts negatively to Icarus’ liquidity problems so Icarus’ stock drops sharply. To stop the drop in share prices, on 1 June 2021, the board of directors passed a resolution to pay a dividend to shareholders. The generous dividend is paid on 4 June 2021 after which it becomes quite clear that Icarus has very little cash reserves to pay creditors and almost no assets to liquidate.

As a last resort and aware that Icarus will not be able to repay Midas Bank in full, Becky transferred on 11 June 2021 the last $750,000 in the company’s accounts to Midas Bank for the $1.5 million overdraft facility. She also transfers a Rolls-Royce Phantom that is the property of Icarus to herself as a reward for her hard work and commitment to the company.

By 23 August 2021, the board of directors have no alternative but to put Icarus into voluntary administration, after which the company goes into liquidation. Unsecured creditors complain that they will hardly recover 30 cents on the dollar.

Advice the liquidator about the circumstances, nature, timeframe and defences, if any, regarding ──

1. the recovery of the Rolls-Royce;
2. the recovery of the $750,000 transferred from Icarus’ accounts;
3. a potential legal action against Icarus’ directors for breach of section 588G of the Corporations Act 2001 (Cth);
4. and the board of directors’ right to pay the dividend in early June 2021.