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MLC707 Business Law Assessment Questions Answer

MLC707 Business Law

Question 1:

Ava meets Titus at a party. Titus is an accountant and financial adviser. Ava tells Titus that she plans to expand her florist business. Titus knows nothing about Ava’s business, but as he was slightly drunk, he tells Ava that her florist business is in a sound position to expand. Relying on that statement, Ava borrows $50,000 from Credit Plus, a small credit union. Unfortunately, things do not go as planned, as Ava has underestimated the costs of expanding the business. Ava has to forfeit $5,000 deposit on new premises and defaults on the loan. Ava now wants to sue Titus for damages.

Advise Ava if Titus owes her a duty of care for negligent statement causing loss. [Do not discuss any other elements of the tort of negligence.]  Your answer should include case law.

Question 2 

For quite some time, Otto has been searching for one of Picasso’s original paintings called ‘The Old Guitarist’. By a stroke of luck, he met an art collector, Maximus, who told him he is in possession of ‘The Old Guitarist’ and for the right price, he is prepared to sell it to him. After a lengthy discussion over dinner, they agree on a price. Otto and Maximus then sign a contract setting out the sale price and date of delivery. One week later, Maximus changes his mind and tries to withdraw from the sale.

What remedy is available to Otto if he wants the painting and is not interested in suing for damages? 

Question 3 

Albert is a well-known local councillor, who is fulfilling his lifelong dream to open a fish and chips shop, so he purchased an eat-in fish and chips café from Fry Investments. During pre-contractual negotiations, the owner of Fry Investments led Albert to believe that the cafe has the capacity to seat 44 paying customers, and, indeed, the layout of tables and chairs confirms that capacity. Under the terms of the fire restrictions, however, the seating capacity is limited to 28 paying customers, which significantly affects the cafe‘s profitability. 

Is Fry Investments in contravention of s 18 of the Australian Consumer Law?

Question 4

Tony is the managing director of Aeroventure Ltd, a flight school that trains pilots and offers leisure flights to tourists. The board of directors passes a resolution limiting Tony’s authority. He is not allowed to enter into any contract exceeding $25,000 of spending without written approval from the board. Tony is given the opportunity to purchase a bargain light aircraft for $35,000, which will be ideal for training young people, so he signs an agreement with the seller on behalf of Aeroventure without consulting the board. 

How much is the board bound to pay, if any, under the law of agency? 

Question 5

Aaron and Jacob are both ballroom dance teachers who have been running their own studios independently to each other, with Aaron providing lessons to adult students and Jacob to school children.  They want to go into business together and combine their efforts, offering private lessons and group classes to both adults and children.  They bring with them into the joint business their students, many of them have been with their respective dance teachers for at least three years having regular lessons, focusing on balance, posture, leading and following, flexibility and style.  They hope to expand their business further in 12 months later to have more dance teachers involved.     

What type of business structure is most suitable for both Aaron and Jacob to set up and why?  Explain fully.

Question 6: 

Based on the above fact scenario in Question 5, should they choose to incorporate their business as a small proprietary company as opposed to a public company and why?  Explain your reasoning fully with relevant sections of the Corporations Act 2001 (C’th).

Question 7

Funfill Village Ltd is in the business of manufacturing electronic toys for children such as battery-operated miniature cars, aeroplanes and boats.  All three directors in Fulfill Village Ltd are also shareholders, each having 30% holding in the company.  The remaining 10% of the shares are held by Adam.  Adam is a mechanical engineer and has been giving lots of ideas to the directors on how to improve the company’s products.  The directors are tired of constant interference from Adam, and propose to amend a clause in the constitution so as to allow the company to acquire shares from members who are not already a director of the company.

Can the directors amend the constitution to remove Adam from the shares register?  Explain with supporting provisions of the Corporations Act 2001 (C’th).  

Question 8: 

Modern Design Ltd is a property developer and Gerry is a major shareholder of that company.  He discovers that Bellman, who is the managing director of the company, has made recommendation to the board of directors to enter into a building supply contract with Brick and More Pty Ltd, a company belonging to Bellman’s cousin, which has low financial standing and is in need of promoting.  As a result of entering into that building supply contract, Modern Design Ltd makes a massive loss in profits and its share prices suffer.  The board of Modern Design Ltd does not want to see the company institute legal proceedings against Bellman.

Can Gerry successfully initiate a court action against Bellman on behalf of Modern Design Ltd for breach of his duties as a director?  If so, how and on what grounds?  Explain with supporting case law and sections of the Corporations Act 2001 (C’th).  


Answer to Question 1:

In the given scenario, Titus is a professional accountant and financial advisor who met Ava at a party. He gave an advice to Ava for expansion of her florist business without having the knowledge about the business positioning of Ava. Also, while giving the advice to Ava, Titus was in the intoxicated condition. By relying on the advice of Titus, Ava borrowed an amount of $50,000 on credit to expand her business which resulted into adverse financial outcomes. Therefore, the act performed by Titus in this case shall be considered as an act under the tort of negligence. He has given the advice to Ava in drunken situation and without assessing the financial position of Ava’s business (Rosen, 2018). Hence, he carelessly caused a financial harm to Ava which is considered as a civil wrong under the law of torts. It was held in the case of “Yates v. Jones National Bank, 206 U.S. 158 (1907)” that it is necessary to prove by the plaintiff that a careless act has caused the harm in direct or indirect form. 

However, Titus may also defend himself by using the rule of contributary negligence or voluntary assumption of risk. As it was known by Ava that Titus was under the intoxicated condition while giving her an advice for her business hence, she could have avoided his given advice or may ask him again when he is in his whole senses. Therefore, Ava may also be held liable for the contributary negligence in the given scenario because she relied on the advice of Titus who was drunk. 

Answer to Question 2:

The presence of all essential elements of contract is necessary to establish a valid and legally binding contract on the parties i.e. offer, acceptance, consideration and intention of the parties. In the given case law, Otto and Maximus entered into a contract for the sale of Picasso’s original paintings called ‘The Old Guitarist’. For such purpose they agreed on all the contractual terms such as price, date of delivery and signed a contract. After a week, Maximus changed his mind and decided to withdraw his offer for sale of painting. In such situation. Maximus has no right to revoke the contract because the agreement between the parties has been formed and it cannot be revoked by either of party without having the consent of another party. It is prescribed under the law of contract that an offer can be revoked by the offeror before an acceptance is received on it but once the acceptance is received it becomes an agreement which is legally binding on the parties (Kwan, 2017). Here, Otto has the right to enforce Maximus for the specific performance of contract or may sue against him for the recovery of damages caused to him due to the breach of contract. Hence, he may direct Maximus for completing the sale of painting or may request the Court to enforce Maximus for performing the contract’s conditions. 

Answer to Question 3:

In the given case law Albert purchased a café from Fry Investment to start his own fish and chips shop. While having the negotiation before forming the contract, the Fry Investment stated to Albert that their café has the sitting capacity for 44 customers but afterwards Albert found that the sitting capacity is limited to 28 customers which eventually affected the profitability of the café. Here, the Fry Investment is liable under section 18 of Australian Consumer Law. As per this section, the Fry Investment performed misleading and deceptive conduct in the business while forming a contract with the Albert by misleading the information related to the sitting capacity of café. Also, the given information by the Fry Investment made Albert believe that café has the sitting capacity of 44 customers which was false (Burdon, 2020). Hence Albert has the right to sue against Fry Investment for making the deceptive or misleading conduct which caused loss in profitability to Albert. 

Answer to Question 4:

Tony was the managing director in Aeroventure Ltd which trains pilots and offers leisure flights to tourists. The board of Aeroventure has determined Tony’s authority to enter into any contract up to $25,000 above which he needs to take written approval of board. Later Tony has entered into a contract to purchase an aircraft for a cost of $35,000 without taking the written approval of the Board. In this case Tony has performed beyond the limits of his duties for which he was not authorised by the company (Langford, 2016). As per the Corporation Act, 2001, a director has some general and statuary duties which includes the duty of good faith, duty of skill, care and diligence and other statuary and common duties. Hence the contract for purchase of aircraft formed by Tony shall not be entertained by the company and it my refuse to pay for such transaction. However, it depends on the company to accept or reject the contract made by Tony as the contract has been formed in the interest of the company which falls under the duty of good faith. If the Board of company decides unanimously to accept the contract in the favour of company then such contract can be entertained by the company and paid by the company (Hill, and Conaglen, 2018). On the other hand, if the company does not find it appropriate then it may take an action against Tony and cancel the contract. 

Answer to Question 5:

Aaron and Jacob are dance teachers and running their own studio whether they provide lessons to adult and school students. To pursue their business for long, they decided to come together for an appropriate business structure in which they could also involve their expert students as teachers in future. As per the detailed requirements in the given scenario, they should adopt the business structure of company in which they could involve number of members in future and may run their business for long. The corporation structure of business has different benefits and properties which would eventually suit the purpose of Aaron and Jacob. By incorporating a company, they may invite more members in their business in future which may also increase the capital and efficiency of their business. In addition to that, they can share the profits without having an unlimited liability towards the company. Also, there is no limit on the number of members in the company which will enable them to include desired number of members in future (Boyer, Van Slyke, and Rogers, 2016). A company is legal person which has its own separate identity hence in case of huge losses, the members of company cannot be held liable personally. Therefore, the most suitable business structure for the business of Aaron and Jacob will be a public company. 

Answer to Question 6:

As per the details given in the above case law, Aaron and Jacob may also obtain the business structure of small proprietary company. In this structure, there are less regulations in comparison to the public company. There can be a single director or shareholder in the company or may include up to 50 members which excludes the shareholders and employees. Aaron and Jacob want a business structure in which they can involve more members in future for the long and efficient running of business. Aaron and Jacob were engaged in the dance teaching which do not need large number of members to be involved in their business in future hence this business structure would be appropriate for them. The small proprietary company has limited liability of the members which is prohibited up to the capital invested by them (Turner, and Ledwith, 2018). The major benefit to start a proprietary company is the applicability of less regulations in the business which is a complex process in case of public company. Aaron and Jacob will need lower capital to start the small proprietary company in comparison the public company. Therefore, to avail the benefits of company business structure and to avoid high complex regulations, Aaron and Jacob should adopt the business structure of small proprietary company. 

Answer to Question 7:

In the given scenario, Funfill Village Ltd have three directors, each of them has 30% shareholding and remaining 10% share was held by Adam. Due to the constant interference of Adam, the directors of company want to remove him from the company and for such purpose, they want to acquire his shares. However, there is no provision in the Corporation law under which the majority shareholders may force the minority shareholders to sale their shares and similarly the minority shareholders cannot force the majority shareholders to buy their shares (Alcalde, and Pérez-Soba, 2016). Hence to remove a shareholder from the company and to force him to sale his shares, few of the tactics can be used by the majority shareholders and directors. The directors may amend the constitution of company by passing a majority resolution through which they could include the provision in the constitution to force the minority shareholders to sale their shares to company. 

Therefore in the given case law, the directors of Funfill Village may amend the constitution of company by holding a meeting of members who holds majority of shares and pass a special resolution to insert the provision through which the shareholders with minority of shares can be forced by the company to sale back their shares to the company (Lee, 2017). For such provision, the event of buy back of shares can be used by the company in which the shareholders can be forced to sale-back their shares to the company. 

Answer to Question 8:

As per the provided details of case law, Gerry is the major shareholder of the company who found that Bellman, managing director of company has entered into a contract with Brick and More Pty Ltd for the supply of building material. The Brick and More Pty Ltd belongs to Bellman’s cousin and he formed a contract with him for provide him some financial benefits. This contract has ended with massive loss to Modern Design Ltd. However, the Board of company does not want to take any legal action against Bellman even after knowing his intention but Gerry wants to initiate a legal proceeding against Bellman on the behalf of Modern Design Ltd for the breach of director’s duty. In that case Gerry may represent a legal suit against Bellman for the breach of duty on the behalf of the Modern Design Ltd. Although both company and directors have separated legal identity and personality and no directors can be held personally liable for the actions of company but in certain cases the directors may held personally liable and the actions can be taken by the directors against another director for the good interest of the company (Trautman, and Ormerod, 2016). This action can be made by the director when the defaulting directors performed a breach of any fiduciary or statuary duty such as duty of care and diligence and other duties under common and corporation laws. In the case of ASIC v Adler & 4 Ors [2002] NSWSC 171 the directors of HH were found guilty for the breach of duty of care and imprisoned for such offence. Hence Gerry may file a suit on the behalf of the company to protect the interest of both company and shareholders because he has the majority power in his hands which eventually empowered him with great duties towards the organization. 

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