Carborundum Pty Ltd (Carborundum) is a company that was incorporated in July 2014. The main business of the company is the manufacture of drilling machinery for the mining industry. The company has issued 50,000 $ 1 shares as follows: Alan, Ben, Colin and Eric Sanders have 4,000 shares each; Donald Thump, a wealthy industrialist, has 12,000 shares; and the remaining 22,000 issued shares are owned by a company called Inventions Pty Ltd (“Inventions”). The directors and shareholders of Inventions are Hilary and Bill Winton. The Carborundum shares held by Alan, Ben and Colin are fully paid up, whilst the rest of the issued Carborundum shares are paid up only to the extent of one cent per share.

Hilary is the managing director of Carborundum and she is also its chief engineer. The other directors are Ben and Colin. Colin is the Chairman of the Board. Alan is the Company Secretary for Carborundum.

Carborundum’s Constitution states,  inter alia:

“Clause 3.        The sole objects of the company shall be to manufacture of drilling machinery.

Clause 4.         Hilary Winton shall be director for life.

Clause 5          The company agrees to employ Hilary Winton as its chief engineer. To amend this clause, there must be 80% approval at a General Meeting. "

Part A             Advice to Hilary         (12 marks)

Hilary seeks advice on the following matters:

(i)                 Explain the potential liability of all of the named parties in the event that Carborundum is wound up with unpaid debts.        (3 marks)

(ii)               How secure is her position as Managing Director of Carborundum?  In particular, discuss what would be the procedure the Company would have to take to remove her as a managing director. (2 marks)

(iii)             Only in this part, assume that Hilary convinces Colin to issue 50,000 $1 shares in Carborundum to Inventions with the requirement that only 1 cent needs to be paid initially. This was decided at a Board Meeting where neither Ben nor Alan was present. Discuss the consequences of this action.      (4 marks)

(iv)             Can Carborundum remove Hilary as its chief engineer? If so, explain how this may be done. If not, explain why not. (3 marks)

 

 

Part B              Advice to Donald (5 marks)

 

Donald has heard that Inventions is considering convening a general meeting, with a view to having the following changes made to Carborundum’s constitution:

(i)                 Deletion of Clause 3 from Carborundum’s Constitution (1 mark);

(ii)               The name of the company to be changed to Winton Ltd (2 marks); ; and

(iii)             Insertion of a clause that allows Inventions Pty Ltd to compulsorily acquire the shares of any member for 10 cents per share. (2 marks)

Donald is strongly opposed to all the proposed changes and seeks your advice on what steps must be taken to effect the changes and how Donald may be able to oppose them. Donald is concerned that the changes may mean that the company will no longer manufacture drilling machinery and instead carry on some other business. He is also concerned that the name change will bring publicity to the “Winton” name at the expense of the Carborundum brand.  Lastly, he is concerned that he is the target of the proposed compulsory acquisition power that is proposed to be granted to Inventions.

 

Part C             Advice to Colin (2 marks)

Hilary has decided to incorporate a new company to enter into the mining industry.  She believes that Carborundum has enough expertise in mining through its exposure to that industry. The new company called Mineral Investments NL (“Mineral”), was incorporated on 2 July 2017 and the only share is owned by Carborundum.  The 3 directors are Hilary, Ben and Colin and Alan is the company secretary. On 3 June 2017 Hilary entered into a contract to buy office furniture on “behalf of Mineral Ltd” from Hardly Normal, a furniture store. The furniture is to be delivered in September.  However Ben and Colin object to the purchase as Mineral will be operating from Carborundum’s present offices and so should not have any need for separate offices or furniture.

Colin wants to know whether the contract is binding on Mineral Investments NL.

 

Part D              Advice to Eric (3 marks)

Eric has a farm that he claims has silver deposits. The land was valued at 1 million dollars in June 2017. He incorporates a company called Silver Pty Ltd (“Silver”) on 2 July 2017. He is the sole director and shareholder of this company. On 3 July 2017, he then sold the land to Silver for 2 million dollars.  On 5 July, he approaches Mineral to purchase the land for 2 million dollars. The purchase price is to be provided by Mineral purchasing 2 million $1 shares of Silver.  In August, a detailed report by an independent geologist established conclusively that there is no silver in the land. Eric is now being sued by Silver. Discuss what are the chances of Eric being able to defend himself.

Part E              Advice to Alan (8 marks)

Alan found out that Ben has entered into the drilling machinery business. He has set up a company called Bendrill Pty Ltd (“Bendrill”) to sell drilling machinery to Carborundum’s existing customers. Alan has been told that Ben approached two of Carborundum’s customers and offered them Bendrill’s products, which are 30% cheaper than Carborundum products. Upon checking in ASIC’s database, Alan finds that Bendrill made a profit of $500,000 in the previous financial year.

Based on the above, Alan wants to know the likelihood of ASIC and/or Carborundum successfully pursuing criminal and/or civil remedies against Ben and/or Bendrill.