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Part A (28 marks)

Kyle is the managing director of Star Ltd, a public company. His wife, Faz, is the chair of the
company. The other directors of the company are non-executive directors, Ben and June, who leave
the running of the business to Kyle. June is a lawyer who runs a busy legal practice and does not
have time to attend Star Ltd’s board meetings. Ben is semi-retired and spends most of his time
fishing. Recently, Ben received an email with the company’s financial statements. He deleted it
immediately as he did not like reading financial statements and found them confusing.

Kyle and Faz decided to renovate their family home using $100,000 of the company’s funds to pay
for the renovation work. Ben and June were not aware of this. At a recent board meeting, Ben
asked Kyle whether the company’s financial performance had been affected by the Covid-19
outbreak. Although the company’s business had suffered significant losses, Kyle assured Ben that
the company was doing well financially as he did not want Ben to ask any more questions about the
company’s finances. In particular, Kyle was attempting to hide the fact that he and Faz had spent
$100,000 of the company’s funds on home renovations.

Faz immediately interrupted the discussion to highlight some urgent repairs that the company
needed. Faz informed Ben that the office toilets were leaking badly and needed replacing. She
suggested getting Pacific Plumbers to replace the leaky toilets. Pacific Plumbers is owned by Faz’s
brother but she did not disclose this to Ben. She also did not disclose the fact that Pacific Plumbers
had quoted $50,000 for the job when their regular plumber had only quoted $10,000. Kyle and Faz
urged Ben to approve the contract with Pacific Plumbers immediately. Ben agreed without raising
any questions as he was eager to leave the meeting to go on a new fishing expedition. June did not
attend the board meeting.

(i) Discuss whether the directors have breached any of their duties and other requirements of the
Corporations Act. Are there any defences they can rely on? What consequences may they face for
breaches of corporations law? (20 marks)

(ii) Hugh, a shareholder of Star Ltd, discovered that Faz and Kyle had used $100,000 of the
company’s funds to pay for home renovations. At a shareholders’ meeting, Hugh complained about
the misuse of company funds and demanded that the company should bring legal proceedings to
recover the money from Faz and Kyle. The directors ignored him and refused to take any action.
Advise Hugh whether he can bring legal proceedings in court on behalf of the company against the
directors of Star Ltd. Explain the relevant law and the steps he would need to take. (8 marks)

Part B (22 marks)

Andy and Ros are directors of Tours Pty Ltd, a company that provides transport for international
tourists. In 2020, the company’s business was badly affected by the Covid-19 outbreak. As
international travellers were not allowed to enter Australia following border closures, the company
did not have any income for most of the year. The cash reserves that they had accumulated in 2019
were used to pay maintenance costs for their fleet of buses. In March 2021, creditors were sending
notices demanding payment for unpaid debts, threatening to bring proceedings in court against
Tours Pty Ltd. The landlord who leased the office premises to the company sent a letter warning
that if they failed to pay the rent again, they would be evicted.

Ros was not aware of all the notices demanding payment for unpaid debts as she was busy home
schooling their children. Andy was very worried about the company’s financial situation. He sought
advice from an accountant who suggested that he sell off some of the buses to pay off the
company’s debts and close the company’s office to reduce expenses. The accountant charged Andy
$1000 for the advice, and Andy paid the amount using the company’s credit card.

Andy decided not to follow the accountant’s advice to sell some of the buses. Instead, he charged
$5000 to the company’s credit card to convert one of the buses into a party bus, hoping to generate
income for the company by running mobile parties. He spent another $2000 to advertise the party
bus. However, there was little interest in the party bus and the company’s financial situation grew
worse. The bank cancelled the credit card and demanded immediate payment.
On 1 June 2021, worried that the company was about to be wound up by creditors, Andy appointed
a voluntary administrator.

(i) Discuss whether the directors have breached any of their duties and other requirements of the
Corporations Act. Are there any defences they can rely on? What consequences may they face for
breaches of their duties? (12 marks)

(ii) Advise the landlord whether she may evict Tours Pty Ltd from the premises for unpaid rent while
the company is in voluntary administration. (4 marks)

(iii) Assume that at the end of the period of voluntary administration, a liquidator was appointed.
The liquidator discovered that Andy sold three of the company’s most valuable tour buses to his
sister for $5 on 31 May 2021. Advise the liquidator whether the value of the tour buses which Andy
sold to his sister for $5 may be recovered for the benefit of creditors. In your advice be sure to
explain the relevant law. (6 marks)

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