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Company law issues and solutions
  • 3

  • Course Code: LAWS7010
  • University: Western Sydney University
  • Country: Australia

Instructions:

1.    Answer all five (5) questions set in the Assessment paper. 
2.    When answering the assessment questions:
•    You should refer to legislation and case law where relevant;
•    You should use the full case citation, i.e. the name for cases and legislation the first time and then use short-form names thereafter, if you wish;
•    You should use the Harvard/WesternSydU style for referencing;
•    Your answer paper must be a Word document; and
•    Do not include an assignment cover page, as this will increase the similarity percentage.

Question 1: 

Jane, Robert, and Maria are passionate about sustainable agriculture and teamed up to establish an organic farm called "GreenHarvest." Jane and Robert transformed a picturesque piece of land, adding eco-friendly structures and landscaping. Maria meticulously curated the farm's ecosystem by selecting heirloom seeds and sustainable farming practices. Their combined efforts extended to hiring a team to oversee daily farming operations.

After a successful six months, Jane decided to step back from the farming business to devote more time to her environmental advocacy work. Robert and Maria agreed to continue running the farm under the same name. Oliver, who has been providing essential organic fertiliser to the farm since its inception, is unaware of Jane's departure and continued to supply fertiliser to the farm. Jane's departure resulted in a decrease in the farm's revenue. Oliver hadn't received payment for four months of supplies and was contemplating legal action against Jane, Robert, and Maria to recover the payments owed.

Meanwhile, tensions escalated between two farmhands, Harry and Roy leading to disputes over crop rotation responsibilities and who had authority over the daily work schedule.

On a particular day, a local restaurant owner named Sarah ordered a variety of organic produce for her farm-to-table menu. Amidst a disagreement on the farm, an unfortunate oversight occurred: a crucial batch of heirloom tomatoes was not included in the delivery due to a communication error. As a result, Sarah's restaurant faced challenges in serving its signature dishes, leading to customer dissatisfaction and a temporary drop in business.

Briefly answer the following questions with reference to relevant law that may apply to these facts.
(a)    Explain the type of business structure Jane, Robert, and Maria have formed and advise Oliver who he can sue for the debt. (3 Marks)
(b)    Advise Sarah if the owners of the farm and/or the farmhands are liable for the loss suffered by her. (3 Marks)

Question 2: 

Global Trade Ltd (Global Trade), a key player in the international shipping industry, maintains a worldwide presence. The company is registered in Australia, with its headquarters situated in Sydney. Given the extensive scope of its shipping operations, Global Trade consistently relies on substantial debt financing to fund ongoing maritime ventures.

To facilitate in-house financing, Global Trade established a wholly-owned subsidiary named Trade Finance Ltd (Trade Finance). Trade Finance appointed five directors, all of whom hold positions on Global Trade's board. Trade Finance itself doesn't employ any staff; instead, Global Trade provides the workforce, which is compensated from Trade Finance's funds. It was mutually agreed that all of Trade

Finance's profits would be distributed as dividends to Global Trade.

Trade Finance has played a critical role in financing various shipping projects of Global Trade. One notable project is the Global Cargo Initiative. This endeavour aimed to develop and maintain a fleet of cargo vessels, aligned with Global Trade's mission for efficient international shipping.

However, the initiative faced logistical challenges, required more frequent maintenance than initially anticipated, incurring higher costs, and suffering from declining maritime transport demand. After unsuccessful attempts to sell off the project, Global Trade's board decided to terminate the venture. Trade Finance categorised the outstanding loan to Global Trade for the

Global Cargo Initiative as a bad debt and subsequently sought a tax deduction under applicable tax legislation.

In response, the Commissioner of Taxation issued a notice disallowing the tax deduction, asserting that Trade Finance was effectively an extension of Global Trade's operations. The directors of Trade Finance are discontent with this decision and seek advice on how to appeal against the decision of the Commissioner of Taxation.

Advise the directors of Trade Finance as to their chances of success in claiming the tax deduction for the bad debt arising from the failed business project undertaken by Global Trade using relevant case laws.

Question 3 

Sophia, Daniel, Olivia, and Ethan are the four directors of TechNexus Pty Ltd (TechNexus) which specialises in cutting-edge technology. Sophia is the chair, Daniel is the Chief Executive Officer (CEO), Olivia is the Chief Operating Officer (COO), and Ethan is the Chief Technology Officer (CTO) of the company. Their vision is to create a state-of-the-art virtual reality gaming platform on a company-owned property in Silicon Hills.

This project represents TechNexus's bold entry into the virtual gaming industry. Daniel, a dynamic force within the company, is eager to kickstart the project at the earliest opportunity. Without obtaining formal board approval, Daniel reaches out to a trusted advisor, Michael, a renowned video game developer, and seeks recommendations for a suitable game development studio.

Michael suggests Quantum Games Studios, a company he had collaborated with in his previous role. Daniel engages Quantum Games Studios to craft a proposal for the virtual reality gaming platform and maintains an ongoing dialogue with them about potential gaming challenges.

Several weeks later, Quantum Games Studios completes their proposal for the virtual gaming platform and sends it to Daniel, along with an invoice for the work completed up to that point. During the next TechNexus board meeting, Daniel presents the gaming proposal and invoice.

To his surprise, Sohpia, Olivia, and Ethan express their frustration, as Daniel bypassed their involvement and failed to secure board approval for engaging the game development studio. This isn't the first instance in which Daniel is acting unilaterally without their consent, and their patience is wearing thin.

None of the three endorses the gaming proposal, finding it significantly different from their vision of the virtual gaming experience. They refuse to approve TechNexus's payment of the invoice.

Advise TechNexus whether they are contractually liable to pay the bill for the work done by Quantum Games Studios, referring to relevant statutory provisions under the Corporations Act 2001 (Cth) and case law.

Question 4 

Ava is a fashion investor and is always looking for emerging, cutting-edge fashion brands to invest in. Recently, she faced substantial financial losses due to the collapse of her investment in a luxury fashion label, Luma Couture, and decided to sell her high- end boutique located in the heart of Beverly Hills.

In May 2023, after discussing with her partner, Leo, and her sister, Mia, Ava established a new fashion company called Luxe Trends Pty Ltd (Luxe Trends) to create sustainable and eco-friendly fashion lines. Ava took the lead in the company's registration process.

Leo and Mia, while not directly involved in setting up the company, had an understanding that they would each receive $20,000 in cash upon the company's official registration. After the registration process was completed, Leo and Mia became the first directors and shareholders of Luxe Trends.

Ava entered a contract with Luxe Trends to sell her boutique for $2.5 million. However, the market value of the boutique was considerably lower than the purchase price specified in the contract. According to an independent valuation report, the property value of the boutique was estimated at $500,000.

Despite this valuation disparity, the two directors approved the purchase without further inquiry. After Luxe Trends was taken over by a listed investment company, Symphony Ltd, new directors assumed their roles and discovered that Ava had sold the boutique to the company at an inflated price. This discovery led Luxe Trends to initiate legal action against Ava, Leo, and Mia.

Advise Luxe Trends if the company has a legal recourse against Ava, Leo, and Mia. Discuss with reference to legislation and case law where relevant.

Question 5

EduVista Innovations Ltd (EduVista) was established as a collaborative effort between LearnUp Foundation Ltd (LearnUp), a non-profit organisation dedicated to improving access to quality education, and TechGenius Solutions Pty Ltd (a company specialising in e-learning software development).

EduVista's constitution limits its operations to the development of innovative educational technology to improve educational access for disadvantaged communities and "related endeavors that reasonably advance these objectives."

EduVista entered into an agreement to provide an advanced e-learning platform to the Crestwood Grammar School, which is one of the most expensive private schools in Sydney. LearnUp had previously declined to engage with the Crestwood Grammar School due to concerns about disparities in educational access. This new collaboration sparks concerns within LearnUp. As a shareholder in EduVista, LearnUp's members are worried about how this contract aligns with their organisation's mission and commitment to equitable education.

Can LearnUp, as a shareholder of EduVista, challenge the validity of the contract on the grounds of a breach of EduVista's constitution? Explain your answer by referring to legislation and case law where relevant.

ANSWERS

Question 1 (A)

Issue: Identifying Jane, Robert, and Maria's GreenHarvest business structure and determining who Oliver can sue for fertiliser debt is crucial.

Rule: Australian businesses are usually sole traders, partnerships, companies, or trusts (Ioannou and Kelley, 2023). The Partnership Act of each state governs partnership formation and operation. All general partnership partners are personally liable for partnership debts and liabilities.

Application: Jane, Robert, and Maria's joint venture, profit sharing, and GreenHarvest management suggest a general partnership. With Jane's departure, the partnership's structure and liabilities may have changed, but Oliver wasn't informed. The Partnership Act holds all partners jointly and severally liable for partnership debts.

United Dominions Corporation Ltd v Brian Pty Ltd (1985) 157 CLR 1 established partner liability for partnership debts. Oliver supplied fertilisers under the assumption of a partnership with Jane, resulting in unpaid debts.

Conclusion: Since all general partnership partners are personally liable for partnership debts and liabilities, Oliver can sue Robert, Maria, and Jane for the unpaid fertiliser debt if her departure did not result in a legally recognised dissolution. 

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(B)

Issue: GreenHarvest's owners and/or farmhands' liability for Sarah's loss from missed heirloom tomato deliveries is the main issue.

Rule: An Australian contract breach occurs when one party fails to fulfil their obligations (Viven-Wilksch, 2020). In cases of non-delivery, the Competition and Consumer Act 2010 (Cth)'s Australian Consumer Law (ACL) provides consumer redress.

Application: Sarah contracted with GreenHarvest for organic produce delivery. Heirloom tomato delivery failure may constitute a breach of contract. The contract's terms and whether the owners or farmhands were negligent or had authority may determine liability (Viven-Wilksch, 2020).

The Koompahtoo Local Aboriginal Land Council v Sanpine Pty Limited (2007) 233 CLR 115 case explains contract law's repudiation principle, which may apply depending on the contractual agreement and failure to deliver.

Conclusion: The farm's owners would be liable for Sarah's loss due to the breach of contract, depending on the contract and the circumstances of the heirloom tomato delivery failure.

The farmhands' liability may vary depending on their authority and responsibility in business operations, requiring a deeper look at GreenHarvest's organisational hierarchy and contractual obligations.

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Question 2

Issue: The key issue is whether Trade Finance Ltd (Trade Finance) can claim a tax deduction for the bad debt from Global Trade Ltd's failed Global Cargo Initiative, especially after the Commissioner of Taxation denied the deduction on the grounds that Trade Finance operates as an extension of Global Trade.

Rule: The Income Tax Assessment Act 1997 (Cth) governs bad debt taxation and deductions (McGregor-Lowndes et al., 2020). Under Australian law, a company can deduct bad debts under certain conditions.

Legal distinction between a parent company and its subsidiary, as well as independence and separateness of operations, may affect tax treatment of transactions between them (Hargovan et al., 2023). The High Court's decision in Federal Commissioner of Taxation v Radilo Enterprises Pty Ltd (1999) 199 CLR 306 may help.

Application: Global Trade has created Trade Finance as a wholly-owned subsidiary to facilitate in-house financing. The two companies share directors and employees, and Global Trade receives all Trade Finance profits.

The interconnected operations and shared leadership may support the Commissioner of Taxation's claim that Trade Finance is an extension of Global Trade, affecting the bad debt's tax treatment.

The failed Global Cargo Initiative, financed by Trade Finance but executed by Global Trade, caused the bad debt. Writing off the loan as bad debt and claiming a tax deduction is standard business practise.

However, the Commissioner's disallowance of the deduction suggests that Trade Finance and Global Trade's financial arrangements may not meet ITAA 1997 bad debt deduction requirements.

Trade Finance's directors may need to prove that Trade Finance and Global Trade operated at arm's length and that the loan was a legitimate business transaction. They may also need to prove that all ITAA 1997 bad debt deduction requirements have been met.

Conclusion: Trade Finance's appeal against the Commissioner's decision will depend on its directors' ability to distinguish between Trade Finance and Global Trade and comply with the ITAA 1997's bad debt deduction requirements. 

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Question 3

Issue: The main question is whether TechNexus Pty Ltd (TechNexus) is contractually obligated to pay Quantum Games Studios for the work done, despite Daniel's engagement without board approval.

Rule: The Corporations Act 2001 (Cth) governs this scenario. Section 126 of the Act allows an individual with the company's express or implied authority to make, vary, ratify, or discharge a contract. Under section 128 of the Act, a person dealing with a company may assume its internal management follows its constitution. The common law also explains company officers' apparent authority, as in Freeman & Lockyer v Buckhurst Park Properties (Mangal) Ltd [1964] 2 QB 480.

Application: TechNexus CEO Daniel hired Quantum Games Studios to create a virtual reality gaming platform proposal without board approval. As TechNexus' CEO, Daniel may have apparent or ostensible authority to enter into contracts, especially in areas related to the company's normal business operations. TechNexus's hiring a game development studio for a project related to its virtual gaming venture may seem routine.

According to Freeman & Lockyer, the principle of ostensible authority suggests that Quantum Games Studios could reasonably assume that Daniel had the authority to commission the work if the board had previously allowed him to act unilaterally in similar circumstances or if his position as CEO typically includes the authority to engage third parties for project proposals.

However, if the board had expressly restricted such authority or if Quantum Games Studios' engagement was significantly beyond the company's ordinary business, the contract may be unauthorised.

Conclusion: TechNexus may pay the invoice if Daniel had actual, implied, or ostensible authority to hire Quantum Games Studios. TechNexus may be liable for the invoice if Daniel acted within his CEO authority. TechNexus could challenge the contract if his actions are unauthorised. 

Question 4

Issue: Luxe Trends Pty Ltd (Luxe Trends) wants to know if it can sue Ava, Leo, and Mia for overvaluing the boutique, given their roles as first directors and shareholders and Ava's as the seller.

Rule: The Corporations Act 2001 (Cth) (the Act) governs company directors and officers. Section 181 requires directors and officers to act honestly, in good faith, and in the company's best interests. Section 182 also prohibits using one's position to benefit oneself or others or harm the company. ASIC v Adler [2002] NSWSC 171 shows how courts may apply these provisions.

Application: As Luxe Trends' initial directors, Leo and Mia had to approve the boutique purchase in the company's best interests under section 181 of the Act. The independent valuation shows a large discrepancy between the contract price and the boutique's market value, raising questions about Leo and Mia's good faith and Luxe Trends' best interests (Hargovan et al., 2023). They may have violated their duty to act in the company's best interests by not investigating the valuation discrepancy before approving the purchase.

Ava's role in selling the boutique at an inflated price to Luxe Trends, a company in which she had a significant stake, particularly early on, may also be examined. She was not a director, but her role in founding Luxe Trends and her agreement with Leo and Mia regarding cash payments upon registration may raise questions about her misuse of position or dishonesty.

ASIC v Adler shows how directors breached their duties by misusing their positions and failing to act in the company's best interests. This case could support a claim that Leo and Mia violated their director duties.

Conclusion: Luxe Trends may sue Ava, Leo, and Mia for Corporations Act 2001 (Cth) violations. Leo and Mia may have acted against the company's best interests, and Ava may have acted dishonestly. 

Also Read - Corporate Governance Law Assignment Help

Question 5

Issue: LearnUp, a shareholder of EduVista Innovations Ltd. (EduVista), wants to challenge Crestwood Grammar School's contract for violating EduVista's constitution, which limits its operations to improving educational access for disadvantaged communities.

Rule: The Corporations Act 2001 (Cth) (the Act) governs Australian company operations and constitution enforcement (Duvenhage, 2020). Section 140 of the Act states that a company's constitution (if any) and any replaceable rules are contracts between the company, its members, directors, and company secretaries, and each member. The company and members are bound by the constitution as if they were covenanted to follow it. Hickman v Kent and Romney Marsh Sheep-Breeders' Association [1915] 1 Ch 881 establish that the Act's contractual mechanism can enforce internal management issues governed by the company's constitution.

Application: EduVista's constitution clearly states that it helps disadvantaged communities through educational technology. EduVista's engagement with Crestwood Grammar School, an affluent school, appears to contradict its mission.

Section 140 of the Act states that a company's constitution has contractual effect, so LearnUp, as a shareholder, may challenge Crestwood Grammar School's contract.

The contractual nature of EduVista's constitution may allow LearnUp to argue that the contract with Crestwood Grammar School violates the company's objectives. The Hickman principle, from the case above, can be used to enforce EduVista's constitution against its directors.

Conclusion: EduVista's constitution violation under the Corporations Act 2001 (Cth) could allow LearnUp to challenge Crestwood Grammar School's contract. This challenge is plausible because EduVista's mission is to help disadvantaged communities, but engaging with an affluent school violates the constitution. 

References

Duvenhage, A., 2020. Personal liability of company directors towards company creditors under the Companies Act 71 of 2008: much ado about nothing?.
Hargovan , A., Adams , M. and Brown , C. (2023) Australian Corporate Law. 8th edn. Lexis Nexis. 
Ioannou, J. and Kelley, M., 2023. Partnership tips and traps. Taxation in Australia, 57(7), pp.390-397.
McGregor-Lowndes, M., Balczun, M. and Williamson, A., 2020. An examination of tax-deductible donations made by individual Australian taxpayers in 2017-18.
Viven-Wilksch, J., 2020. Good Faith in Contracts: Australia at a Crossroads. U. of Adelaide Law Research Paper, (2020-92).

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