Business Law Assignment: Corporations, Directors, and Negligence

This business law assignment addresses several key areas of corporate law. The first question concerns a winery owned by two partners, exploring their current business structure (likely a partnership) and the suitability of this structure for a potential sale and investment from a new partner, including recommendations for alternative business structures. The second question focuses on shareholder rights, specifically Leo's situation as a shareholder of a company, detailing his rights and the actions he can take when the company's directors make decisions that negatively impact him. The third question delves into director's duties, examining the liability of directors of a public company under the Corporations Act, particularly concerning financial statements, negligence, and breaches of duty leading to the company's insolvency. The fourth question focuses on auditor liability, discussing the duty of care owed by auditors, the requirements for a third party to sue an auditor for negligence, and the policy reasoning behind this concept.

QUESTION 1
Dilara and Aysha have inherited a winery from their Great Grandfather Ankit, called
“Ankita”. Dilara and Aysha have continued to run the winery as a going concern. They
share profits equally.
As the years progressed, it had become apparent that Dilara and Aysha did not have enough
working capital to keep the winery going. In addition, given Great Grandfaher Ankit was
rather old and liked “old things”, the winery became run down, and large amounts of money
need to be spent to restore the winery.
Dilara and Aysha are approached by Polat, a well-known French winemaker, who wishes to
buy part of the Ankita Winery and work there as a chief winemaker.
Dilara and Aysha are excited as both Polat’s money and expertise are desperately needed at
Ankita. Dilara and Aysha visit your office and ask your legal advice as to:
a) what type of business organisation are Aysha and Dilara currently operating; and
[5 marks]
b) whether their current business structure is the most suitable vehicle for selling part of
the Brothersglen Winery to Polat or whether they should consider another form of
business structure, and, if so, which one?
[10 marks]
[Total Marks: 15 Marks]

QUESTION 2
Leo purchased two shares in Thomas The Tank Engine Pty Ltd for $500,000 in total.
Thomas The Tank Engine Pty Ltd makes and builds trains which they manufacture and sell to
retail stores. Leo, now a non-executive director of Thomas The Tank Engine Pty Ltd, is
unhappy with the state of affairs of the company. The following occurred:
Thomas The Tank Engine Pty Ltd revenue has increased 300%
Leo has received no dividends to date and Ruby and Amanda, the two executive directors of
Thomas The Tank Engine Pty Ltd, have decided to pay no dividends this year. Ruby and
Amanda have voted themselves a large pay rise and bonus. Ruby and Amanda have arranged
for Thomas The Tank Engine Pty Ltd to lease two expensive cars for their exclusive use. Leo
attends his first directors’ meeting and questions the dividend policy and asks that he
objection to the lease of the cars be recorded.
Amanda and Ruby decide to remove Leo from the board. They hold a members’ meeting and
remove Leo from the board.
Advise Leo as to his rights as a shareholder/member.
[TOTAL MARKS: 10 Marks]

QUESTION 3
The board of Tobacco Alp Coffee House Ltd (TACH Ltd), a large coffee bean company
listed on the Australian Stock Exchange, which makes the best possible coffee beans in the
world, is comprised of three directors, two of whom are executive directors and one of whom
is a non-executive director:
 Vanessa is the managing director of TACH Ltd. She has been the managing director
for 5 years.
 Kurt is a non-executive director who barely attends board meetings, and is Vanessa’s
partner.
 Erol is an executive director of the board, who has substantial experience in the coffee
bean industry, and is also the Chief Financial Officer of TACH Ltd.
The board of TACH Ltd has recently entered into a number of investments, including a new
coffee bean factory, and some investments which have been losing large sums of money. At
a board meeting in August 2016, the board considered the company’s financial statements
relating to the loss making investments. The financial statements were negligently prepared
and showed a profit instead of a loss. These financial statements were prepared by Erol.
During the board meeting, Erol failed to tell the directors about the loss and Vanessa failed to
ask any questions about the financial statements, and Kurt (as per usual) was absent from the
meeting. Due to time constraints, Vanessa failed to read the financial statements, believing
that Erol would discuss the statements with him if there were any important matters that
required his attention.
The board of directors do not identify the mistake and authorise further investment in the loss
making business ventures. By September 2016, TACH Ltd is insolvent.
Discuss any liability of the directors of TACH Ltd in relation to these events. What are the
consequences, if any of a breach of the Corporations Act? Refer to relevant legislative
provisions and case law in your answer.
[TOTAL MARKS: 25 Marks]

PART B
QUESTION 4
An auditor owes a duty of care to their clients, and not usually to third parties who rely on the
auditor’s report. What is the policy reasoning behind this concept? What must a third party
prove in order to be successful in negligence against an auditor? Do you agree or disagree
with this concept? Discuss.
[TOTAL MARKS: 10 Marks]
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