HI6027 Business & Corporations Law: Detailed Case Study Analysis

This assignment presents a detailed case study analysis of business and corporations law. Part A focuses on contract law, specifically examining the validity of a letter of comfort and the intention to create legal relationships, referencing relevant case laws like Edwards v Skyways Ltd and Esso Petroleum Co Ltd v Mardon. It concludes that the letter of comfort in question did not have contractual effect, representing a moral obligation rather than an enforceable contract. Part B delves into corporations law, addressing whether a director misused confidential information for personal gain, contravening the Corporations Act 2001 (Cth). It applies section 183 of the Act, discussing the duties of directors and referencing Regal (Hastings) Ltd v Gulliver, ultimately suggesting the director violated these provisions and is subject to civil penalties. Desklib offers similar solved assignments and past papers for students.

Running head: BUSINESS LAW
Business law
Name of the Student
Name of the University
Author Note

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Part A
Issue
The issue in this case is to analyze the validity of the letter of comfort. The case also analyzes the
presence of Intention to create a Legal relationship.
Rule
In the case of Edwards v Skyways Ltd [1964] 1 All ER 494 an airline company made few
of its pilots redundant as it was in financial difficulties. There was a promise made to the pilots
that they would be provided with ex gratia payment. This had been considered through a
resolution between the board of the company as well as agreement between association
representatives and company representatives (Fitzpatrick et al. 2017). The plaintiff left the
company and made claim for the payments. The company argued that even where there was a
consideration the contract cannot be enforced at law as it is a mere moral contract. In this case
the issue before the court was to considered whether there was intention of creating a legal
obligation on the part of the airlines company. The court in this case ruled that in case an
agreement has been reached in the course of business affair and not in social or domestic context
it is presumed that the contractual parties have intended to create legal relations. The party who
is rebutting the presumption has to show that there was a mere moral obligation and not an
enforceable contract. In this case the circumstances inferred that there was intention on the part
of the company which could not be rebutted.
In the case of Esso Petroleum Co Ltd v Mardon [1976] 2 All ER 5 there was a tenancy
agreement between the plaintiff Mardon and the defendant Esso Petroleum in relation to a petrol
station which the defendant owned. There was an expert evaluation done in relation to the sale

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estimate of the petrol pump which was based on inaccurate information and the figures were
inflated. The value of the agreement had been calculated relying on the inflated figures of sale.
Thus it became impossible on the part of the plaintiff to operate profitably the pump. The issue in
this case was that whether the plaintiff can make a claim in relation to misrepresentation in the
light of the fact that the figures were an estimate rather than a statement of fact. In this case it
had been ruled by the court that the plaintiff cannot get out of the contract by relying on
misrepresentation as the inflated figure of sales were mere estimates rather than a statement of
fact (McKendrick 2014).
Application
There was an agreement between the plaintiff bank and the defendant to provide a loan
facility extending up to 10m to the wholly owned subsidiary of the defendant. The subsidiary had
traded in Tin with respect to the London Metal Exchange. In relation to the arrangements two
letter of comforts had been furnished by the defendant to the plaintiff. In each of the letters it had
been provided that “It is our policy to ensure that the business of [M] is at all times in a position
to meet its liabilities to you under the [loan facility] arrangements” in para 3. The market had
collapsed and the plaintiff were owed by the subsidiary the whole amount of money under the
loan. The subsidiary was subjected to liquidation and the plaintiff made a claim against the holding company. In
the trial case it was held by the judges that the defendants were liable to compensate the plaintiff
due to the letter of comfort provided by them (Knapp, Crystal and Prince 2016). However the
decision was overturned in the appeal. This is because a letter of comfort provided by the parent
company to a lender containing the clause that the policy of the parent company in relation to the
subsidiary being in the position to meet its liability at all times in relation to the loan which is to
be provided did not have any form of contractual effect. It is only a statement which presented

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the facts in relation to the intentions of the parent company and did not result in a contractual
promise with respect to the future conduct of the parent company. In addition with respect to the
facts the 3rd para of the letter of comfort is to be considered as a statement regarding present facts
and not at all a promise regarding future conduct and in the situation in which the letter had been
provided did not have any kind of intention rather than a factual representation which gives rise
to mere moral responsibility imposed on the defendants to pay the debts incurred by the
subsidiary. The court considered the rules on Edwards v Skyways Ltd where it had been
mentioned by the court that in case an agreement has been reached in the course of business
affair and not in social or domestic context it is presumed that the contractual parties have
intended to create legal relations. The party who is rebutting the presumption has to show that
there was a mere moral obligation and not an enforceable contract. The defendants in the present
case were able to make the rebuttal there was a mere moral obligation and not an enforceable
contract. In addition it was held by the court that there was no misrepresentation on the part of
the defendant with respect to the letter of comfort. This was asserted by relying upon the case of
Esso Petroleum Co Ltd v Mardon where it was ruled that where there is only an estimate made
by the defendant and not a statement of fact there would be any form of misrepresentation on the
part of the defendant. Thus the court ruled in favour of the defendants in the present case.
Conclusion
A letter of comfort provided by the parent company to a lender containing the clause that the
policy of the parent company in relation to the subsidiary being in the position to meet its
liability at all times in relation to the loan which is to be provided did not have any form of
contractual effect

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References
Fitzpatrick J, Symes C, Veljanovski A & Parker D, Business and Corporations Law 3rd ed.
(2017), LexisNexis Butterworths Australia.
McKendrick, E., 2014. Contract law: text, cases, and materials. Oxford University Press (UK).
Knapp, C.L., Crystal, N.M. and Prince, H.G., 2016. Problems in Contract Law: cases and
materials. Wolters Kluwer Law & Business.

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Part B
Issue
The issue in this case is whether there has been use of confidential information on the
part of the director of the company for the purpose of making personal gain and contravening the
provisions of Corporations Act 2001 (Cth).
Rule
Section 183 articulated in the CA 2001 provides for one of the statutory duties owed by
the directors to the corporation which has provided them with the power to manage its
operations. The section expresses that any person who acquires information because of being or
they had been an officer or director or employee of a corporation should never use the
information improperly in the pursuit of gaining advantage for themselves or any third party or
subject the corporation on context to a disadvantage or loss (Talbot 2015).
This section is a regulatory offence as provided for in the legislation. On a regular basis it
is usual for the directors of an organization to be aware of or gain knowledge about data which
may be not made available publically and is kept confidential even form the shareholders of the
company. At common law the directors are not provided ability utilise such information to for
pursuit of personal benefits and interest. It is not a matter of concern for the court that whether
the actions of the directors have caused any harm to the company or whether it has taken any
opportunity from the company through which it has gained. It is merely required that the
directors have used the information in way which is in relation to personal benefits. This rule had

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been discussed by the courts in the case of Regal (Hastings) Ltd v Gulliver [1967] 2 AC 134.
However, this rule cannot be considered as absolute and is subjected to a few exceptions. It had
been realized by the parliament that more than often common law has been ignored. The
temptation is relation to realizing an improper way of making profit was very much (Milman
2017).
Section 183 has another purpose which is equally important. The section attempts to
create a rule regarding a conduct which is mandatory for proper behaviour of commercial life in
order to ensure that people would be provided with the required confidence that the market is in
safe hands (Fitzpatrick et al. 2017).
The breach of s 183 of the CA is a civil penalty provision under the rules of s 1317E of
the CA. When the court has come to the conclusion that a person has violated the provisions of
section 183 the declaration is provided under section 1317E. after this and order is made by the
court under Section 131 7G that the directors are required to pay a pecuniary penalty to the
Commonwealth if the court has come to the conclusion that the contravention made by the
director is serious or hampers the ability of the company to pay its creditors or hampers the
interests of the company and its members. The court may additionally make an order under
section 1317H under which the directors are required to compensate the corporation for any
damages which have been resulted out of the contravention made by the directors. The court may
also provided disqualification order in relation to the directors under which they would not be
allowed to manage Corporation for specific period under section 206C.
Application

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The defendant was a non executive director in the company Telstra Corporation Limited.
He had himself established the corporation with the name of Creative Technology investment
Pty Limited. In this company the sole director and shareholder was Mr Lay. In this case it has
been found by the court that the dependent director had entered into three transactions during
2000 as a result of obtaining confidential information with respect to his capacity as a non
executive director of Telstra through which he got the knowledge that the transactions are going
to be profitable. Only because the dependent director had got the knowledge that the share price
of sausage is going to rise he provided instructions to Mr Lay to purchase shares in the company.
After the Purchase took place Telstra announced about the merger with sausage. Due to the
merger the share price of sausage substantially became high and the company of the defendant
director was able to make unrealized profit amounting to $140,000. In another transaction the
defendant director has got the knowledge that because his company is going to sell off their
shares in another company he sold the shares of the other company to avoid loss. This
knowledge could have only gained by him as a non executive director of Telstra. In relation to
the third transaction there was an acquisition of interest in a company keycorp limited by Telstra.
This knowledge was attained by the defendant directors and instructed Mr Lake to purchase
shares in keycrops that they are able to make a profit. the three transaction theory signify that the
defendant directed has used the information gained by him through Telstar as he was the director
and this information was also not available to the public for personal benefit. This means that the
provision of this section has been violated by the defendant director and he would be subjected to
the civil penalty provisions. In this situation the court had to determine that whether the breach
which has been made by the defendant directors in this situation is to be considered as a serious
breach or not so that the pecuniary penalties could be imposed. The court also had to determine

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whether the director is to be subjected to ban from managing the corporation. In this case the
penalty which had been proposed by the ASIC was $130000 for every contravention. However
the court held that the maximum penalty which can be imposed is of $200000. The director had
been suspended for a period of 5 years from managing corporations in Australia.
Conclusion
There has been use of confidential information on the part of the director of the company
for the purpose of making personal gain.

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References
Fitzpatrick et al. 2017 Business and Corporations Law 3rd edition
Milman, D., 2017. A review of developments in partnership law 2017. Sweet and Maxwell's
Company Law Newsletter, (399), pp.1-5.
Talbot, L., 2015. Critical company law. Routledge.