BUSL301 Final exam Session 1 2013
The exam does not include: Lecture Area 1-4 Lecture Area 9 [Week 10] (Takeovers / Financial Services and Markets) The Role of Auditors / ASIC Investigation (these are both in Lecture Area 7 [Week 8]) Everything else is examinable – that is, within the range of material that may be included in the final exam Part A of the exam (20 marks) is multiple-choice (10 x 2 marks per question) Part B of the exam (40 marks) has 2 problem style questions requiring written responses (15 marks each) and 1 short answer style question (with 5 questions worth 2 marks each). Look at the Unit Guide and the Assessment Guide Also on iLearn are: Coversheet for the exam Practice Questions Answer Guide to Practice Questions

This question paper must be returned. Candidates are not permitted to remove any part of it from the examination room.

SEAT NUMBER: ……….… ROOM: .………………. FAMILY NAME.………….....…………………………. OTHER NAMES…………….…………………..…….. STUDENT NUMBER………….………..……………..

SESSION 1 EXAMINATIONS – JUNE 2013 Unit Code and Name: BUSL301 Corporations Law Time Allowed: Two hours (2) plus 10 minutes reading time Total Number of Questions: Part A has 10 questions; Part B has 3 questions Instructions: 1. All Parts are compulsory. 2. This exam is worth 60% (60 marks) of your overall assessment. 3. Part A is worth 20 marks and is comprised of 10 multiple-choice questions worth 2 marks each. It must be answered on the Answer Sheet provided. 4. Part B is worth 40 marks and is comprised of 3 questions. Question 1 and 2 are worth 15 marks each and Question 3 is worth 10 marks. All questions in Part B must be answered within (and must not exceed) the separate 6 page answer booklet. 5. Writing must be legible, answers clearly set out and your details entered as required. For Part A see the instructions on the multiple-choice Answer Sheet. For Part B answers must be written in pen (ink), not pencil. Materials Allowed: None This is a ‘closed book’ examination - the following are not permitted: Dictionaries, calculators, books, notes, electronic or written aids of any kind.

BUSL301 Revision What follows is a sample/revision exam – it is in the same overall format as the final exam (Part A multiple-choice; Part B written responses) – however the number, style and type of the questions are not necessarily the same – it does not necessarily indicate the content or complexity of the actual exam – however, it does allow you to practice the skills you will need - the questions in the sample exam are for your private study and revision purposes – the content in the sample questions has been covered in the relevant class and is accessible in the texts – accordingly you should be aware of the issues relevant to the questions and be able to revise and check your responses/answers for yourself. Note though that there is a separate document on iLearn with suggested answers as a guide. You can also practice by setting out questions for yourself and then writing short answers – for example: Why do directors have fiduciary duties? What is a civil penalty? What factors are relevant in a consideration of whether a shareholder has been oppressed? – after a little study you can make up lots of questions like these and then write a few lines worth of answer – don’t use your texts to help you answer – the benefit is in using what you know and modifying it so that your response is as precise as possible. Practice your tutorials – these are good examples of the sort of things you will be asked in the final exam. Note: The final exam Session 1 2013 (2 hours plus 10 minutes reading) is worth 60 marks (60% of your total assessment) – it is a closed book exam there will be 2 Parts – Part A will be worth 20 marks, it is comprised of 10 multiple-choice questions worth 2 marks each. Part B will be worth 40 marks, it requires written answers and is comprised of 3 questions.

Sample/Revision PART A 1. Fulham Pty Ltd is in a poor financial position, it has many creditors and is insolvent. Its directors transfer its assets to a new company they recently formed called Konstam Pty Ltd. Which one of the following is false: (a) It is likely that the directors of Konstam have breached their duties to as they have made improper use of information relating to the fact that the company was in financial difficulty (b) Konstam Pty Ltd can be referred to as a phoenix company (c) The transfer of assets by an insolvent company will not amount to a breach of duty by its directors unless the company is actually in liquidation (d) Insolvency of a company will mean that the directors owe their duty to the company’s present and future creditors. 2. There are no age limits on directors: (a) True (b) False 3. Shareholders can be given notice of an extraordinary general meeting at any time prior to the meeting: (a) True (b) False 4. A company’s directors are collectively known as the ‘board’: (a) True (b) False 5. A company can be wound up voluntarily if it is insolvent: (a) True (b) False 6. ASIC can disqualify a person from managing a corporation for up to 15 years without a court order: (a) True (b) False 7. Which one of the following is true: (a) In ASIC v Healey (2011) 196 FCR 291 (concerning Centro Properties Group) the court held that the non-executive directors did not breach their duty of care and diligence (b) Company liquidations do not have to be advertised (c) A liquidator is an ‘officer’ as defined in the Corporations Act (d) A director can appoint an administrator. 8. Which one of the following is true: (a) The “two strikes” rule (s 250U Corporations Act) only allows shareholders a non-binding vote on whether the directors should be forced to vacate their positions (b) If a person is disqualified from managing a corporation they cannot participate in decisions affecting a substantial part of the company’s business. (c) Only shareholders can call a general meeting of the company’s shareholders. (d) In voluntary administration the directors share the running of the company with the administrator.

PART B Question 1 Ben is a graphic designer and shareholder in Snowzone Pty Ltd (“Snowzone”) a profitable graphic design company. He holds 200 of the 1,000 issued shares. The other 800 shares are divided equally between the other 16 graphic designers in Snowzone. Two of these other 16 graphic designers are the directors of the company. Ben did not support the election of these directors but a majority of the other shareholders voted for them. The company has paid dividends to the shareholders from time to time but not for the last 3 years. Snowzone uses computer hardware supplied by Nicola Pty Limited. The 2 directors of Snowzone, Larry and Ron, are in fact shareholders in another computer hardware supplier, Zabriski Pty Limited, and they, together with some of the shareholders of Snowzone favour a change in the hardware supplier to Zabriski Pty Limited. The directors accordingly call an extraordinary general meeting so that the shareholders can vote on a change of the hardware supplier. Ben has consistently voiced his opposition to a change to Zabriski Pty Limited. Ben has also recently begun contacting other shareholders seeking their support in requesting that the directors pay a small dividend in the current year. He has little success with the shareholders but still puts his proposal to the directors. Larry and Ron and the majority of shareholders, several of whom are relatives (family) of the directors, are not in favour of the payment of a dividend and have indicated their intention to vote for a change of the hardware supplier. These majority shareholders consider Ben is a troublemaker. Accordingly the directors reject Ben’s request for the payment of a dividend and propose that Snowzone’s constitution be changed at the forthcoming extraordinary general meeting from one vote per share to one vote to every ten shares up to a maximum of ten votes per shareholder. Discuss Ben’s position as a shareholder. What are his rights and what orders are available. Your answer should include reference to relevant cases and sections.

Question 2 TT Pty Ltd has creditors owed in total $68,000 and is running at a loss. The company is financed by a loan of $200,000 from Eastpac Bank (Eastpac). Eastpac has security in the form of security interests over all the assets of the company. The loans from Eastpac are also secured by a personal guarantee from Tom, a director, and his wife. Tom is particularly worried about his personal exposure under the guarantees he and his wife have given and about the welfare of his employees who have been very loyal during difficult times. He has heard of a new government subsidy program that will fund new employees but he is unsure how this will apply to current employees. TT has been late in the payment of rent on its Ryde shopfront premises each month for the last five months but has eventually managed to find the necessary funds, usually at about the time the second threatening letter has arrived. One or two of the cheques sent to the landlord have bounced the first time they were presented. The company owes a particularly large debt ($15,000) to Gem Electrical Supplies Pty Ltd (Gem). Gem has served a statutory demand. The 21 days has expired. Tom sees his accountant who tells him not to worry and just keep going. He tells him to pay Gem $10,000 to “get rid of them” and not to tell anyone about the company’s other debts. Should Tom be worried? Question 3 “Corporations Act regulation of insolvency is unnecessary - creditors can take care of themselves.” Discuss.

BUSL301 Here are some ideas on answering the questions in the sample/revision exam already available on iLearn – the responses in relation to the problem style questions should be used as a starting point for you to focus your attention in the area – you should improve on the responses, add to them – also you should go over the other practice questions done throughout the part of the unit that relates to the final exam.

PART A 1. c 2. b 3. b 4. a 5. a 6. b 7. c 8. b PART B Note: these answers are guides only – students should expand upon them by drawing on their own understanding of the relevant area. QUESTION 1 This question concerns members’ rights. The problems facing Ben relate to both personal and derivative rights. Firstly it is reasonable to discuss s 236 and derivative rights (proceedings on behalf of the company) – for example there would seem to be an action by the company re a breach of fiduciary duties by Larry and Ron which neither of them would want the company to bring [their self-interest would prevent it]. If s 236 is used there would need to be an assessment of the criteria in 237 (good faith, best interest of company, serious question, company won’t bring action, rebut the business judgment rule). Ben may seek an injunction under s.1324 but would have to satisfy the criteria of a breach or suspected breach of the Corporations Act. The directors’ conduct is clearly relevant here. How would you categorise their actions? They seem to have a conflict and may breach fiduciary and statutory duties. The other shareholder issue concerns oppression and s.232 and the orders in s.233 should be examined. Cases like Wayde and Gambotto as well as any other cases highlighting oppression could be used. Ben’s voting rights have been affected. The issue of what a reasonable board would do is relevant. Are the actions of Larry and Ron as majority board members reasonable? Cases like Morgan, Sanford, are relevant here. Mere non-payment of a dividend may not be oppression but are there other factors in the question which may impact. These other factors should be weighed up (such as the director’s conflict, the reduction of Ben’s voting power). QUESTION 2 The commencement of a VA may help hold off the enforcement of the personal guarantees (via the stay) – the directors can appoint an administrator (436A) – however Eastpac seems to be a substantial security interest holder – therefore may avoid the stay (441A) – thereby hopes of a successful VA are reduced. Eastpac as a secured creditor could appoint a receiver. Eastpac has a security interest over all of the business’ property – this would mean that TT could no longer trade if the security was enforced.

If Gem were paid would it be a voidable transaction? What does the expiration of the 21 days mean in relation to what Gem can do and what process must it follow? Here if the demand has expired Gem can commence proceedings to wind TT up. Has Tom traded while insolvent – the relevant sections are 588G and 588H – (see 588G for exact wording of the test to be applied) – clearly the business is not doing well and yet continues to trade – it seems that in the situation much of what the company is undertaking involves insolvent trading – are there defences? Could Tom expect solvency in relation to the government subsidy program? Tom could not ignore the fact that a statutory demand has been served (and the 21 days have elapsed) – can he rely on the advice of his accountant and do nothing? Certainly the evidence regarding late payment of rent, cheques bouncing, goes to insolvency – would a reasonable director have suspected insolvency? If Tom is found to have breached s 588G he could find that the liquidator could target him personally in relation to the company’s debts.

QUESTION 3 The reason for regulation of insolvency is to create order in, and avoid a situation where, creditors may be vying for what is left of an insolvent company’s assets – this would favour the larger more powerful creditors and leave the more numerous unsecured creditors with little – so the legislation exists to ensure the unsecured are given an opportunity – the liquidator or administrator is the means by which parity (based on a hierarchy of priorities) is achieved – regulation provides predictability – the upshot is that some creditors (those with security interests) can look after themselves because of their priority – but there are many creditors whose entitlements would be hard to recoup where it not for the sections that enable ‘clawing back’ funds (588FA – FG; 588G), or that enable ordered distributions (555, 556). [Your focus is to respond to the proposition of whether creditors can take care of themselves – to do this you would contrast creditors rights with, and without, the benefit of the Act – this involves explaining what the Act actually achieves – sections would be relevant.]