LST5CCL-Foundations Of Company And Commercial Law

Question 1

Rachel, Vanessa and Stephanie meet each other while studying at La Trobe University. They decide to go into business together calling the business Coffee’s R Us. Their plan is to start up a coffee roastery.  Rachel specialises in coffee roasting.  Vanessa has a passion for coffee, and particularly use of alternative milks in the coffee. Stephanie knows the ins and outs of accounting, finance and investing.

In order to keep things simple, they decide to keep it simple and just write down some rules of their agreement on a serviette.  They write that they agree to put equal money into the business and to share the profits equally, and that everyone will be involved in the management of the business.  They run the Café Coffee’s R Us for two years.

After two years, they want to purchase a new coffee roaster.  However, they are still a bit short of money so they decide to participate in one of the television shows and pitch their business to a group of experts. To their surprise, one of those experts, Dakesh decides to join their business and provides a loan of $100,000 for which he will receive a 10% of the gross profit over 5 years.  Dakesh as ‘investor’ will also provide some mentoring but will not be involved in the actual decision making of the business.  In fact, Dakesh is really concerned about the liability for any personal injury of customers by slipping on the floor.

(a)Under what type of business structure is the business currently running (i.e the business that is being run by Rachel, Vanessa and Stephanie?)

(b)Whether their current business structure is the most suitable for the café (now that Dakesh is willing to join the business), or whether they should consider another form of business structure, and if so which one? Give reasons for your answer.

Question 2

The board of The Best Banana Cake (TBC Ltd), a large coffee bean company listed on the Australian Stock Exchange, comprised of four directors, three of whom are executive directors and one of whom is a non-executive director:

Brendan is the managing director of TBC Limited.  He has been on the board of TBC Ltd for several years.

Stephen is a chartered accountant and is the Chief Financial Officer at TBC Ltd and is an executive director of TBC Limited.

David is an executive director of the board who has substantial experience in the banana cake industry.

Jane is a non-executive director who barely attends board meetings and is a hairdresser.

The board of TBC Ltd has recently entered into a number of investments including a new kitchen in which to create the best banana cake, and other investments which have been losing large sums of money. At a board meeting in March 2019, the board considered the company’s financial statements relating to the loss making investments.  The financial statements were negligently prepared and showed a profit instead of a loss.  These financial statements were prepared by Stephen.

During the board meeting, Stephen failed to tell the director’s about the loss and David failed to ask any questions about the financial statements, and Jane (as per usual) was absent from the meeting.  Due to time constraints, Brendan failed to read the financial statements, believing that Stephen would discuss the statements with him if there were any important matters that required his attention.

The board of directors do not identify the mistake and authorize further investment in the loss making business ventures.  By May 2019, TBC Ltd is insolvent.

Discuss any liability of the directors of TBC Ltd in relation to those events.  What are the consequences, if any of a breach of the Corporations Act? Refer to relevant legislative provisions and case law in your answer.

Question 3

Santosh operates a successful fast-food franchise called “Santosh’s Food”.  Tasty Pty Ltd is keen to open a ‘Santosh’s Food’ outlet in the Melbourne suburb of Bundoora.  The parties reach an agreement that Tasty Pty Ltd will operate a Santosh’s Food restaurant in Bundoora for a period of five (5) years.  The agreement contains the following terms:

9.  Santosh promises that he will not open another Santosh’s Food franchise within the Bundoora area during the franchise period (that is, five (5) years)

13.   Tasty Pty Ltd promises that it will operate the restaurant strictly in accordance with the laws and regulations set out in the Health Act.

One year after the restaurant opened, Tasty Pty Ltd was charged and found guilty of breaching the Health Act.  Santosh immediately cancelled the remainder of the Franchise agreement and opened another Santosh’s Food franchise in Bundoora.  Santosh decided to operate this new franchise himself.

Advise Tasty Pty Ltd whether it has an action for breach of contract against Santosh, and (if so) what the appropriate remedies might be.  Give reasons for your answer.  Assume that your answer is not affected by the Franchising Code of Conduct.

Question 4

Under section 180(1) of the Corporations Act 2001 (Cth), directors have a duty to act with care and diligence, according to the size of the company and according to the size of the company and according to the responsibilities expected of that particular officer.  Under section 180(2), there is a defence that the decision was a proper one under the circumstances, even though the decision later turns out to be not so good for the corporation.

What is the criteria that a director needs to satisfy under section 180(2) in order to establish this defence? Do you think that section 180(2) does a good job in protecting directors in making business decisions? Does it need to protect director’s better?