ACC204: Corporations Law Assignment- Flyway Pty Ltd- Case Study Help

Case Study Assignment

Corporations Law Assignment

Flyway Pty Ltd is a small private small airline company operating charted flights for small groups of up to 12 people between Adelaide and Mount Gambier.

Peter, Paul John and Joseph are Directors of Flyaway. Recently one of their charted flights disappeared without a trace during flight. Two months later another flight was shot down by a terrorist group. These two incidents had a major impact on Flyaway’s profitability. Business was on a rapid decline and if things didn’t improve Flyaway was going into liquidation.

Flyaway decides to repackage its image and expand its business to a wider market in an effort to rescue the company. To do this Flyaway borrows $10 million from Citibank. 8 months later Flyaway goes into liquidation as it was unable to pay its bills.

About this time a new high-speed train company, Speed Bullet Pty Ltd, had started operations in Adelaide covering the very same routes that Flyaway was doing and was also offering more routes and destinations. This new train service which cuts down train journey times by nearly half the usual time was proving to be very popular and was significantly cheaper than flying. This had a major impact on Flyaway’s business.

Paul was not present at the meeting when the decision to expand was made as he was in hospital recovering from a serious accident.

Peter, as was his usual practice, had not attended the meeting but signed the required documentation for obtaining the loan.

It was later discovered that John was approached by Speed Bullet Pty Ltd when the company was being formed and was now a significant shareholder of Speed Bullet. The rest of the directors of Flyaway were unaware of this.

In the meantime, Mary, a Flyaway shareholder, who is unhappy with Flyaway’s expansion decision convinces a few other shareholders and calls for a meeting and a resolution is passed disapproving the Citibank loan and the expansion plans.

Advise the directors of Flyaway if they may have breached any of their directors’ duties and if they have to follow the resolution passed at the shareholders’ meeting.

Issues

There are two issues that are raised in the present question and which are addressed after the analysis of the Relevant law.

• Whether the Directors of Flyway Pty Ltd are in violation of their duties?
• What are the impact of the meeting that is undertaken by Mary and other shareholders of Flyway Pty Ltd?

Relevant law

When a company is formed then there are several person who are made part of such company such as employees, officers, shareholders, directors etc. Section 9 of the Corporation Act 2001 submits that a Director is a person who is appointed at the position of a Director or is an alternate Director or a shadow director. Further a person is considered to be a director provided such person carries out the functions of directors regardless of the position that is attained by him. Thus, a person is a director whether he is designated at the position of a director or not provided he performs all the functions that are part of the position of Director. (ASIC, 2016)

Section 198A of the Act specifically submits that the affairs of the company must be managed under the directions of the directors of the company (CSA, 2011). The section specifically submits that the directors have the power to borrow money on behalf of the company and exercise the powers except those which are to be complied specifically in the board meeting. (Australian Corporations & Securities Legislation, 2011)

However, with the power come the responsibilities. Thus there are various responsibilities that are allocated to the company directors as per the Corporation Act 2001.

Section 180 of the Act specifies that the company directors must act with all due care and diligence when the directors are acting while holding his position of a director. The extent of care and diligence is judged from the point of view of what are normal prudent man will judge in the like circumstances and thus is an objective test (Statewide Tobacco Services Ltd v Morley (1990)). If the risk is foreseeable and does not justify the benefits than no action must be undertaken which hampers the position of the company. However, as per section 180 (2) if the director can establish that the decision undertaken by him was under good faith, for proper purpose, have no material personnel interest in the transaction, rationally believes that the transaction is in the interest of the company and is based on expert opinion than the Director can protect himself and cannot be considered to act in absence of due care and diligence. The rule lay down under section 180 (2) is called business judgement rule and is

analysed in AWA Ltd v Daniels (1992). (Duties, 2016)

Further, one of the significant aspects of due care and diligence is that the directors of the company must attend the meeting of the company. If the company directors does not attend the meetings without just cause then the director is held to be in violation of his duties. (Dean Lisson, 2015)

Section 181 of the Act submits that a director must carry out his duties in good faith and in the supreme interest of the company and that the purpose of the transaction must be proper. The duty of good faith is said to be violated when the purpose is not proper even though the intention of the directors is not bad. Thus, the directors must be very cautious while carry out his functions in order to avoid any kind of violation. (Patricia Dermansky, 2016)

Section 182 ad section 183 of the submits that the director must use his position and the information that is acquired by him only for the benefit and for the best interest of the company, any misuse of the position and any use of information not or the benefit of the company is nothing but the violation of section 182 and section 183 of the Act may invite penalties to the directors. (Duties, 2016)

Section 588G is a very important duty which must be comply by the directors in order to avoid liquidation of the company section 588G submits that the directors must not trade while the company is insolvent or may become insolvent because of such trading, if the directors undertook any activity that results in the liquidation of the company than all such directors who are involved in such activities will be held liable for the violation of section 588G of the Act.

Section 191 of the Act submits that if any director has any material personnel interest in any transaction that is undertaken by the company than such director has an obligation to disclose such interest to all the other directors of the company. Section 194 specifically submits that a director who has material personnel interest may only vote provided such material personnel interest is disclosed by such director to all the other directors of the company.

Thus these are some of the duties that must be furnished by the directors of a company.

Also,

It is important to submit that whenever the directors pass a resolution by due process than such resolution is binding on the company. However, what happens when the shareholders of the company pass a resolution against the decision of the directors. It is held in in Australasian Centre of Corporate Responsibility v Commonwealth Bank of Australia (2015) by the Federal Court that the primary role to manage the affairs of the company is on the directors and the role of the shareholders is limited in this regard specifically in regard to those situations

where the power is vested in the directors of the company. Thus, the shareholders cannot interfere in the working of the company if a valid resolution is passed by the directors of the company by passing another resolution.

Application

The relevant law is applied after evaluating the facts,

Flyway Pty Ltd (Company) operates charted flights (upto 12 people) between Adelaide and Mount Gambier. Peter, Paul, John and Joseph are the company Directors. Recently one plan disappeared and another was shot dead by a terrorists group because of which the business declined. If the downfall continues then it may result in the liquidation of the company. The company decides to repack its image and expand business to a wider market in order to rescue the company. The company tool a loan of $10 million from Citibank. After 8 months the company went into liquidation because of its failure to pay its dues.

However, Mary one of the shareholder along with other shareholders calls a meeting disapproving the decision of expansion and the approval of loan.

Also, Speed Bullet Pty Ltd (Speed), a new company starts its operation on the same routes (and many more) on which the earlier company was operating. The journey was short because of speed of the train and was cheaper when compared with flying.

The coming of speed has a huge impact on the business of the company.

It was found that:

Paul was not present when the decision of expansion took place as he was hospitalised.

Peter had not attended the meeting as a usual practice but signed the documents require d to obtain loan.

John was the significant shareholder of Speed and was approached by speed when the same was incorporated. No other Director was aware of the same.

Thus, after evaluating the facts of the case, the issue raised are resolved.

In regard to Issue 1 it is submitted that there are various duties that are violated by the directors of Flyway Pty Ltd.

1. The company took loan from Citibank. It is submitted that the directors has duty to prevent insolvent trading under section 588G of the Act and any violation will make them liable under the law. All the Directors took loan without analysing the financial position of the company and knowing that the company’s financial position is bad. However, still taking of loan is an additional financial burden on the company resulting in its liquidation. Thus, the directors are liable for insolvent trading.

   However, Paul will not liable be liable for the insolvent trading as he did not attended the meeting in which the decision for loan is taken.

2. Peter has an obligation to attend all company meeting. However by not attending the meeting, Peter is in violation of section 180 of the Act, that is, the duty of care and diligence.
3. John was the significant shareholder of Speed and was approached by speed when the same was incorporated. No other Director was aware of the same. Thus, John has violated his duties under section 191 and section 194 of the Act. John ha material personnel interest which was not disclosed thus John must ace consequences of the same.
4. All the directors of the company are together liable for volition of section 181 of the Cat by not acting within good faith and in the best interest of the company by taking decision arbitrarily.

Thus, there are numerous duties that are violated by the directors and actions must be undertaken to bring civil and criminal actions against the defaulters.

Further, in order to resolve issue 2 it is submitted that the resolution passed by Mary and other shareholders of the company has no significance as the directors are authorised to pass resolutions to manage the affairs of the company. However, when a director passes any resolution than such resolution supersedes the resolution passed by the shareholders of the company. The Directors are responsible to manage the company affairs and not the company

shareholders. Thus, the decisions in regard to the affairs of the company are only the responsibilities of the directors and thus there is no significance of the resolution that is passed by the shareholders of the company.

Conclusion

Thus, it is concluded that the directors must carry out their duties in order to avoid any legal consequences. However, the company directors have violated their duties by not complying with the statutory provisions. Thus, the directors are held liable and must be penalised for the same. Further, the resolution passed by the directors supersedes all other resolutions of the company (even the resolution passed by the shareholders of the company). This is because since the directors are person who manage the affairs of the company, thus, the shareholder are not authorised to interfere in such power. So the resolution by Mary has no significance and is not binding.