PROBLEM QUESTION PART A (1500 word limit)
Blue Pty Ltd (Blue) is a proprietary company that develops software solutions for finance companies. Melanie, Daniel and Sarah are the three directors of Blue and each hold 25% of the total shares. All three directors are involved in the management of the company. Melanie is the CEO, Daniel the CFO and Sarah is Sales and Marketing Manager. The remaining 25% of shares are held by Daniel’s brother Max, who is not involved in the management of the company.
In 2009 Blue approached AMGL to set up JVI as a joint venture between AMGL and Blue to invest in automated finance technology. Asset Management Group Ltd (AMGL) is a public company limited by shares. Blue and AMGL each own half of the shares in JV Investor Pty Ltd (JVI). In 2012, JVI proposed that AMGL and Blue each invest a further $500,000 to allow the company to develop a new automated investment software technology based on blockchain.1
Melanie was the architect of the joint venture proposal with AMGL and she has negotiated the terms of Blue’s recent equity injection in JVI. She is unaware that Daniel and Sarah have formed a new company with Sarah’s boyfriend Mitchell, Crystal Clear Pty Limited (“Crystal”). Mitchell is a brilliant software engineer and is on the verge of a breakthrough in adaptations to blockchain that would make it a more accessible product for the finance industry. Blue had previously been invited by Mitchell to invest in his project, but Melanie had declined. The decision was partly based on Daniel’s advice to the Board that the project was not financially viable for Blue. Mitchell subsequently found an angel investor to fund his project in return for shares in Crystal. As Mitchell’s project is nearing completion, he, Daniel, and Sarah have arranged for Crystal to be converted to a public company and have listed it on ASX. Daniel and Sarah are both aware that Crystal’s new blockchain technology will be a significant competitor to the product that is being developed by JVI.
In the meantime, Melanie has a few problems of her own. She is also a director on the Board of JVI and has discovered that JVI’s accountant has been embezzling funds. She is concerned that AMGL might discover JVI’s true financial position and put JVI into administration. This would put Blue’s investment in JVI at risk and would severely damage her own reputation. As a short-term solution, she has secretly transferred funds from Blue’s cash reserves to cover up the embezzlement until she works out how to best manage the situation.
To make matters worse, at a recent board meeting Daniel proposed that Blue should lend $200,000 of the company’s cash reserves to Max’s new winemaking venture, Winning Wines Pty Ltd, at an interest rate of 2.0%. Melanie expressed concern about the loan on the grounds that Blue should be maintaining its cash reserves given the size of their commitment to JVI. She also expressed concerned about the low-interest rate and that no security was being given for the loan. When Daniel and Sarah outvoted Melanie and the loan was given to Winning Wines Pty Ltd, Melanie had no choice but to top up Blue’s cash reserves from her own personal account. Six months later Max advised the directors of Blue that Winning Wines Pty Ltd had gone into liquidation and would be unable to repay the loan. Melanie is furious with Daniel for placing Blue in such a tough financial position (although it remains solvent) and worse she has lost her own personal savings. She has also discovered Daniel and Sarah’s involvement with Crystal and the large profits they have made on the sale of some of their shares when Crystal listed on ASX last month.
PART A (15 marks)
1. Advise Daniel and Sarah if they have breached any fiduciary obligations owed to Blue (both general law and statutory duties) in relation to:
a. Their involvement with Crystal (5 marks)
b. The loan to Winning Wines (5 marks)
2. Advise Melanie if she has breached any fiduciary obligations owed to Blue or JVI? (at general law or under statute) (5 marks)
PROBLEM QUESTION PART B (question adapted from questions in PS6 [26-350]) (1500 word limit)
At the time that JVI approached AMGL to make a further investment in its blockchain project, the directors of AMGL delegated to Gina Gunter, AGML’s company secretary and general counsel, the task of investigating the investment proposal and reporting back to the board. Gina supervised the due diligence and retained IT experts to prepare a report on the prospects of the proposed blockchain technology. She appeared to be a very keen supporter of the project and was very positive about its prospects. The IT report prepared for the board indicated that the proposed investment should be very successful. At the board meeting, some of the directors were sceptical about the IT report’s optimistic forecasts. They questioned Mr Chester who was a director of AGML with specialist information technology qualifications. He assured the board that the report was reliable. The board unanimously agreed to go ahead and make the additional investment in JVI. 12 months later, it becomes clear that things are not going well for JVI. Gina Gunter has resigned from her position as general counsel for AGML. This followed revelations that her partner, who is JVI’s accountant, had been charged with embezzlement and fraud. Gina was not aware of her partner’s fraud, but she was aware that he was under a great deal of pressure and appeared to be very stressed. She admitted that her investigation and reporting on the blockchain project was not at the high standard that AGML had come to expect from her. She admitted that her bias in favour of the project was likely to have been influenced by her desire to achieve a positive outcome for JVI and indirectly her partner. It was also discovered that the IT report was negligently prepared. Mr Chester admits that his IT qualifications are rapidly becoming outdated and he was too embarrassed to admit that he lacked a sophisticated understanding of blockchain technology.
Part B (15 marks)
1. Did Gina Gunter breach her duty of care to AGML and if so does she have any defence? (5 marks)
2. Have the directors of AGML (or any of them) breached their duty of care and if so, what relevant defences might be available to them? ( 5 marks)
JVI has four directors, Adderson and Boon from AGML and Melanie and Jack (replacing Daniel) from Blue. The chief operating officer of JVI has sent a report to the board of JVI explaining that there are serious cash flow problems and that rival technologies are emerging. The report also indicates that JVI’s prospects for raising any further debt or equity capital are limited. At a JVI board meeting, the directors resolve to enter into an agreement with a German software firm to purchase some intellectual property to assist with the blockchain project. The directors are confident this intellectual property will help JVI gain a competitive edge and trade its way out of its current financial difficulties. Adderson is on holidays and does not attend this board meeting.
3. Have the directors of JVI (or any of them) potentially breached their statutory duty to prevent insolvent trading? Are any defences available to any of them? (5 marks)