PROBLEM QUESTIONS

Answer all three questions.

QUESTION 1:

Tony is a Perth-based entrepreneur who has been developing artificial intelligence software using a machine-learning algorithm to randomly generate and compose pieces of music.

Tony believes his technology will have numerous applications, particularly in the marking and advertising space. However, he is aware a lot more work is needed to develop the technology into a commercially viable product.

Tony’s daughter, Morgan, is currently completing her PHD in Computer Science and has been instrumental in helping Tony develop the code. Tony wants to start the business soon because he wants to create a stream of passive income   for retirement and also set up a trust fund for his children, Morgan and James. Before he can retire, he wants to ensure that any income generated by the business stays in the business for future development purposes,  and also channel some  money into the bank-accounts of his children, to help them out.

Morgan is keen to join the business in one to two years’ time when she has completed her PHD. She has limited capacity to take on extra work now but has agreed to help Tony when she can.

To get things started, Tony will have to take out a loan from the bank.

Tony asks you whether a sole-trader entity or a private incorporated entity would be best for his situation. Compare and contrast  the two business structures and suggest which would be best. (5 marks)

QUESTION 2:

Peter and Mary-Jane decide to open a café in Nedlands, They have called it  The Daily Brewery and have incorporated a private company called The Daily Brewery Pty Ltd, as a vehicle for the business. Peter and Mary-Jane own 45% each of the shares in The Daily Brewery Pty Ltd. Norman Ozbourne, a well-known Perth barista, owns the remaining 10% of shares in the company.

The company has a constitution which states that Norman Ozbourne is appointed Master Coffee Maker for life. Several customers have complained to the directors that they have been suffering from light-headedness and various stomach problems. The directors discover that Norman has not been cleaning the coffee machine with the correct product and is instead using bleach. The directors decide to remove Norman as Master Coffee Maker and find a replacement.

Norman writes to the directors demanding his job back as per the company’s constitution, which he purports is a contract between him and the company. He contends that he must be reinstated or the company will be in breach of this contract.

Peter and Mary would like to know whether they are obliged to reinstate Norman as Master Coffee Maker. (5 marks)

QUESTION 3:

Steve has decided he will register a company called Starky Computer Hire Pty Ltd which will offer for-lease computers to businesses around Perth. Before he is ready to register the company, he looks for computer manufacturers so that he may create a supply-chain of products to lease to his clients.

Steve signs a 2-year service agreement with Eternal Computers Pty Ltd, which states that Eternal Computers Pty Ltd will supply Starky Computer Hire Pty Ltd with as many computers as they need at a 40% discounted rate for the service period. Eternal Computers Pty Ltd is very proactive and sends Steve 10 computers in advance so that Starky Computer Hire Pty Ltd may begin leasing them immediately after registration. Eternal Computers Pty Ltd advises that another 10 computers are currently being manufactured and will be supplied in four weeks.

Before Steve has registered Starky Computer Hire Pty Ltd, Steve’s brother offers him an attractive cash-in-hand offer for the 10 computers he already has. Knowing that another 10 computers are on the way, Steve takes the money and gives his brother the computers.

Starky Computer Hire Pty Ltd is finally registered and at the first directors’ meeting Steve is unanimously appointed as the managing director of the company.  Ratification of the service agreement with Eternal Computers Pty Ltd is also considered but  other directors opt for another computer manufacturer which they consider better suits the company’s needs and decide not to ratify the service agreement with Eternal Computers Pty Ltd.

2. Steve would like to know whether he will be considered a promoter by the courts in relation to his activity in establishing Starky Computer Hire Pty Ltd. (2.5 marks)
3. Steve would also like to know the likelihood of being held personally liable by Eternal Computers Pty Ltd in relation to the service agreement with them. (2.5 marks)

SHORT ANSWER QUESTIONS

Answer all three questions.

QUESTION 1:

Discuss the reasoning of the court and the significance of the findings of Salomon v Salomon & Co Ltd with regard to the concept of separate legal entity and piercing of the corporate veil. (5 Marks)

QUESTION 2:

With reference to specific sections of the Corporations Act 2001 (Cth), explain the difference between a company limited by shares and a company limited by guarantee.

QUESTION 3:

With reference to the cases of Tesco Supermarkets Ltd v Nattrass [1972] AC 153 and Brambles Holdings Ltd v Carey (1976) 15 SASR 270 explain the concept of a company’s ‘directing mind and will’ and in what circumstances an individual may be considered part of a company’s directing mind and will. (5 marks)