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Happy Holidays Ltd is a listed company that operates a successful budget hotel chain. It has four directors on its board. Adriana, the managing director, Bruce, the chief executive officer and Claire and David, non-executive directors. Claire and David also serve on several other boards in non-related industries and attend monthly meetings.
Adriana, took over as managing director of Happy Holidays Ltd when her father stepped down three years ago. Since that time, she has been trying to prove she is up to the job by diversifying the company into casinos. At a board meeting, Adriana proposes that the company investigate making a bid on a casino licence in North Queensland. She proposes that the company hire a firm of consultants ConsultWise to prepare a report on the prospects of success of obtaining the licence and engage the firm to prepare a tender for the licence if they report that the prospects are good. The board of directors agrees on this proposal and ConsultWise is engaged.
Adriana does not disclose to the board that her partner Frederick is the majority shareholder in Consultwise, that Consultwise has been struggling financially because of a number of poorly executed consultancy agreements and that the firm has never provided advice on the gaming industry. The other directors did not ask any questions of Adriana at the meeting and thought the idea sounded good.
The following month, ConsultWise reports back to the board of Happy Holidays Ltd that prospects of a successful bid for the casino licence are strong and that their consultancy fee would be $3 million. Again the board agrees without question and authorises the expenditure.
Bruce is uncomfortable with the decision as he is aware that the financials of the company are poor due to a downturn in a number of key hotels. This is not evident in the financials for the company, because Bruce has been moving funds among related companies to make it look as though there is strong investment in Happy Holidays Ltd.
After six months, ConsultWise fail to win the licence for the new casino. It becomes clear shortly after that there was very little prospect of winning the bid as Happy Holidays Ltd did not fit the tender criteria. This was known to ConsultWise when it reported to Happy Holidays Ltd that they had good prospects of securing the licence. ConsultWise in fact applied less than a quarter of the money received from Happy Holidays Ltd towards the bid and used the remainder to fund the renovation of Adriana and Frederick’s home.
When this becomes public knowledge, the shareholders of Happy Holidays are furious as their shares rapidly lose value. This is compounded when the extent of Bruce’s activities to shift money between companies becomes apparent on close inspection of the company finances.
A group of shareholders seeks your advice as to whether there have been breaches of the Corporations Act 2001 (Cth) in the above circumstances. Consider each of the directors and any possible defences available to them. Also advise the shareholders what steps would need to be taken to have the board of directors removed.
Question 2 (30 marks) (2000 words maximum)
Steve and Gary hold one share each in Uniform Pty Ltd. Uniform Pty Ltd supplies uniforms for school children. Both Steve and Gary are directors of the company.
Uniform Pty Ltd has been struggling since a new competitor opened two doors down. They are behind on their tax and have been late in paying utility and lease payments for several months.
However, they are approaching the busy period before the start of school and expect to be in a better position once that ends. They have experienced similar cashflow problems in the past but have always been able to trade through them.
To stock the store for the busy period, Uniform Pty Ltd makes a large order with Harry’s Fine Outfitters. As Harry’s Fine Outfitters has dealt with Uniform Pty Ltd on many occasions, the uniforms are provided on credit. Harry’s Fine Outfitters and Uniform Pty Ltd sign a security agreement on 2 January 2016, which grants a security interest to Harry’s Fine Outfitters in respect to all uniforms supplied to Uniform Pty Ltd. Harry’s Fine Outfitter’s puts the paperwork away intending to register a security interest on the Personal Property Securities Register, but forgets to do so in the back to school rush.
Uniform Pty Ltd also need funds to stock shoes not supplied by Harry’s Fine Outfitters and obtain a loan from Local Bank for $20,000.00 to purchase the stock. A loan agreement is signed on 5 January 2016, funds are advanced, stock is purchased and the bank registers a security interest over all present and after acquired property of Uniform Pty Ltd on 6 January 2016.
Unfortunately, on the first day of the back to school sale, 10 January 2016, Steve and Gary turn up to their shop to find that the landlord has changed the locks and they are unable to continue to trade. They have no funds available and debts owing to the ATO, landlord, utility providers, Harry’s Fine Outfitters and Local Bank.
You are engaged as an accountant by Harry’s Fine Outfitters to provide advice on the circumstances. This should be provided in the form of a letter covering the following issues based on the knowledge you have acquired in this course:-
(a) Which external administration procedure would be preferable for Harry’s Fine Outfitters?
(b) Does Harry’s Fine Outfitters have priority to any of Uniform Pty Ltd’s assets to satisfy its debt? Why/Why not?
(c) Have Steve and Gary breached any provisions of the Corporations Act 2001 (Cth), and if so, what are the consequences for them of this and any defences that may be available to them.
You should utilise primary and secondary sources eg. legislation, case law, textbooks, journal articles, to demonstrate your research skills in support of your advice in the letter, and reference your letter appropriately.
Letter format and communication skills.
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