1. ICE Ltd is a company that installs kitchen facilities, and has four directors on its board:

LAW5206 Corporations Law Assignment (2)

This assignment includes two questions and is worth a total of 60 marks. You are required to answer both questions. The assignment is due at 11:59pm 21 October 2013.

Question 1 (30 marks) (2100 words maximum)

1. ICE Ltd is a company that installs kitchen facilities, and has four directors on its board:

– Abbey, the company’s managing director

– Bob, the company’s chief financial officer

– Cathy, the company’s non-executive director

– David, the company’s non-executive director chairman

The company’s business has been very successful. However, recently it has experience a number of problems.

Following the board decision to offer customers a special installation package, Cathy has negotiated an exclusive contract with Western Sydney (WS) Ltd. Cathy has not informed the board that WS is actually owned by her son. Bob suspects that Cathy is personally connected with WS, however, he has not raised his concern with any of the other directors.

Despite ICE Ltd’s negative cash flow position, Abbey proposes to expand its operations into dishwasher installation. Cathy questions whether the company can afford the costs associated with the expansion. As a result, the board delegates to Bob the task to investigate Abbey’s proposal. Bob, however, spends very little time investigating the proposal due to his busy schedule, and hastily prepares a report recommending that the proposal be accepted.

The next board meeting is very long and the consideration of Abbey’s proposal and Bob’s report is the last item on the agenda. As the directors are anxious to leave, David allowed only 10 minutes for Abbey to present her business plan for the proposed expansion. Bob’s financial report produced after his investigation on the matter was tabled at the board meeting but he was not allowed to speak or answer questions. Nevertheless, the directors approved the proposal. LAW5206 Corporations Law S2 2013

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Following the approval of the proposal, Abbey entered into a contract with Southern Queensland (SQ) Ltd for the purchase of new equipment for the approved proposal. The contract is worth $20,000 and is never paid. Shortly after the contract was signed, the board discovered that Bob’s report had obvious mistakes as he has overlooked many of the additional costs involved in the expansion.

Assume that Abbey’s proposal has been proved to be a financial disaster for ICE, and as a result, the whole board of directors were replaced.

(1) Advise the new directors of ICE whether its former directors breached any of their duties based on the facts stated above. Your advice must be made in relation to each of the former directors. (20 marks)

(2) Advise Abbey, Bob, Cathy, and David individually as to whether they are able to rely on the business judgement rule or any other defences provided by the Corporations Act 2001 to avoid liability. (10 marks)

Question 2 (30 marks) (2100 words maximum)

Eric, France, and George are the only shareholders and directors of Stone Pty Ltd, a trading company that supplies food products to cafes around Toowoomba. In recent times, Stone’s cash flows have been pressured because several large customers, including CafeNow (a large franchise coffee shop with hundreds of outlets), have been late in paying their invoices. This has meant that on several occasions Stone has not had sufficient funds to pay its bills, particularly rent. The owner of its warehouse (Star Ltd) has written several letters warning that if Stone is late in paying its rent, it will be evicted from the premises. At the same time as the company’s cash flow troubles, the employees take industrial action in an attempt to receive a pay increase. This strike stops deliveries from the warehouse for two days, with several customers cancelling their supply contracts with Stone. The cash flow problems are increased when the company’s bank, Eastbank Ltd, threatens to appoint a receiver over the company if it does not pay its monthly interest within two weeks. Eric, France and George convene a board meeting to consider their options. Eric and France would like to negotiate with their creditors to restructure the company’s debts. George, however, would like to sell out and change industries. LAW5206 Corporations Law S2 2013

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You as a professional accountant are asked to write a formal letter to advise Eric, France and George as to their options available under the external administration procedures under the Corporations Act 2001 (Cth). Your letter should

(1) demonstrate and compare the advantages and disadvantages of such procedures. (10 marks)

(2) suggest which procedure is the best option for Stone Pty Ltd to solve their problem, and what impact would the procedure have on its creditors? (10 marks)

(3) You must use both primary and secondary sources, e.g. legislation, case law, text books, journal articles and websites, to demonstrate your research skills in support of your advice in the letter. (5 marks)

(4) Letter format and communication skills. (5 marks)

End of Assignment