Answer both parts
(a) Li was a director of a large Australian public company called Almost Isatan Ltd. It specialized in upmarket retail (with departments of fashion, kitchenware, cosmetics and décor). Li had an MBA from Harvard and was appointed director specifically because of his business acumen. Li’s fellow directors included Ping, who was appointed because she had many years of experience as a buyer for department stores, although she did not have extensive formal business qualifications.
Acknowledging a downturn in profits due to the internet shopping onslaught, the board of directors of Almost Isatan Ltd held a meeting to discuss the future of the company. Li was insistent that the company should change directions and go ‘down market’ so that merchandise at the store would be more affordable. Ping, on the other hand, pointed to a lack of evidence that such a strategy would work. Ping insisted that the evidence showed profit losses in all sectors of retail (both up market and budget) such that restructuring was a better option. According to Ping, there was much wastage in the management of Almost Isatan that could be dealt with to improve the viability of the business.
The remaining board members sought advice as to which director they should follow (Li or Ping). The advisor suggests they should adopt Li’s reasoning because he had an MBA from Harvard. Consequently, the board follows Li’s advice and, over the coming year, the strategy proves unsuccessful. Early on in that twelve months trading period, Ping warned that losses were mounting up despite the change in direction in the company and that the board should reconsider the restructure option. But the remaining board members insisted that they had sought financial advice at the start of the year and they should stick with that advice.
Feeling the stress of the situation, Li went on holiday to Dallas, Texas, where he enjoyed shopping at upmarket kitchen retailer, Williams Sonoma – which was enjoying flourishing business conditions because it restructured instead of going down market. Li did not reveal this information to the board of Almost Isatan on his return to Australia. Instead, he started an upmarket kitchen retail business.
On making a stunning loss, some Almost Isatan board members seek your advice as to potential breaches of directors’ duties by Ping, Li or any other members of the board. In answering, state any further evidence you would seek. Also note the types of remedies that are usually available for breach of duty. If you found that a small group of minority shareholders had always distrusted Li and had made statements at an AGM to the effect that “Li is a twit” – would you be able to establish further legal actions against either Li or the company?
(b) After the failure of Almost Isatan, Ping decides she has had enough of the corporate world and instead goes into partnership with Eric, running a small coffee house. Eric was not especially bright, so he had only limited duties within the partnership. In particular, he was not to purchase coffee beans because he had eccentric taste and seemed only to like incredibly bitter coffee which most people found undrinkable. Despite those limitations, Eric bought a large quantity of beans for the business. On receiving the bill, Ping seeks your legal advice on whether she has to pay. She also informs you that she and Eric are bickering to such an extent (because she thinks he is incompetent) that she either wants to expel him from the partnership or terminate the partnership. Advise Ping. In so doing, briefly explain to her why partnerships are governed the way they are governed (eg does ASIC have a role? Why?) Also discuss any further evidence you might need.
Answer all parts
Septimus was the seventh born child in his family; that is why he was called Septimus – which comes from the Latin word for ‘seventh.’ Despite the fact he had a numerical name, Septimus hated Hip Hop artists because so many of them appeared to be named after numbers (eg 50 Cent).
Because of his love of classical music, Septimus worked in the record industry as a company director for a recording company, My Masters Voice Ltd (or MMV Ltd). MMV Ltd specialized in recording classical music with a twist (eg electric violin artists).
October 2013 proved to be a newsworthy month for Septimus and MMV. First, Septimus received a confidential report that MMV was going to merge with the leading recording company on earth, Mower-town. On hearing that news, Septimus purchased further shares in MMV and Mower-town. He purchased these shares in his own name. Secondly, at a Halloween party, one of the artists who records with MMV said to Septimus: “I’m really happy, the motor company my dad works for – Four Wheels are Better than None Ltd - is about to be cleared by a government enquiry – it turns out their quad-bike wasn’t designed badly, after all. But please do not tell anyone I told you.” Septimus subsequently bought shares in Four Wheels are Better than None. Finally, Septimus read an article in the No Idea Magazine that said smart investors were now buying shares in garden supply companies. Septimus went out and bought gardening shares.
(a) ASIC is now investigating Septimus’ share purchases. They seek your advice on whether his three purchases have breached the Corporations Act. Advise ASIC giving legal reasons.
(b) One work experience cadet at ASIC learns about the Septimus matter and says: “The law relating to this matter is confusing. I am not sure whether Septimus’ share purchases are governed by directors’ duties or some other part of the Corporations Act. Also, even if he pleads guilty, I cannot make any sense out of the principle courts apply when sentencing offenders. I think the law is soft on white collar crime.” Do you agree? Discuss this statement and in so doing, explain the relevant (white collar crime) sentencing principles to the cadet. Are you aware of other problems ASIC has had in white collar crime law suits? If so, discuss them.
(c) Imagine the above facts slightly change. First, instead of buying shares in Mower-town in his own name, Septimus instructs his accountant to buy the shares using a family company. Might that change the sections under which ASIC prosecutes Septimus? Why?
(d) Finally, imagine the facts change again. This time, instead of buying shares, Septimus makes a statement to the stock exchange which he knows is incorrect. When ASIC read the minutes of one directors’ meeting, they find evidence that Septimus must have known the true situation. When confronted with this evidence by ASIC, Septimus simply says: “Well, the minute taker must have got it wrong.” What are Septimus’ prospects of success?
Answer all parts
(a) Mackie (a businessman) and Mitzi (a retired actress) were inspired by the Townsville productions of MacBeth and The Sound of Music. They decided to start a business to produce plays and promote them. Mitzi was happy for Mackie to use her home as a theatre. As time passed, she also advised on what plays might be suitable and she allowed her old costumes to be used. Mackie provided most of the financial capital. (He contributed $10 000 to Mitzi’s $5 000.) The pair signed an agreement headed “Joint Venture.” Sadly, Townsville theatre goers must have been tired of theatre by the time Mackie and Mitzi promoted their first venture. The business failed owing $16 000. Advise Mackie and Mitzi on the true nature of this business and the position regarding liability. Might they have been better off starting a company?
(b) “Insolvency is easy to define. It is simply a company’s inability to pay debts as and when they fall due. There is little for a director to worry about in terms of trading in insolvency; and there is virtually no issue about the corporate veil at all.” Legally analyse this statement.
(c) Lanie was a Liquidator. In the course of winding up a company called Castle Ltd, she found that one director, Ric, had sold company assets to his sister, Kate, for 60% below market value. Ric had also borrowed money from his brother Espo at 60% interest; and Ric had paid money back to his aunt, Gates, even although it was not yet due. Lanie was about to report all of this to ASIC but unfortunately delegated the task of the writing of the report to her assistant, Bones. Bones was well known for being a scatter brain. First, Bones forgot to place the information about Ric in the report to ASIC. (She seemed to think liquidators did not need to talk to ASIC about these things.) Next, Bones held a media press conference in which she said: “I’m going to make all greedy directors pay for their wicked actions.” Shortly after making that statement, Bones landed a job as a director of the company “We hate directors Ltd.” Advise on the legal issues arising in this case.